Income taxes

Income before income taxes was attributed to domestic and foreign taxing jurisdictions as follows (in thousands):



	Fiscal year ended
	December 30, 2017		December 31, 2016	December 26, 2015
Domestic operations	$	317,720	286,927	234,410
Foreign operations	21,567		26,322	(32,822	)
Income before income taxes	$	339,287	313,249	201,588

The components of the provision (benefit) for income taxes were as follows (in thousands):



	Fiscal year ended
	December 30, 2017			December 31, 2016		December 26, 2015
Current:
Federal	$	102,349		97,972		90,586
State	27,922			28,430		23,694
Foreign	3,094			3,808		3,186
Current tax provision	$	133,365		130,210		117,466
Deferred:
Federal	$	(145,903	)	(9,983	)	(19,034	)
State	(791		)	(3,152	)	(3,060	)
Foreign	1,707			598		987
Deferred tax benefit	(144,987		)	(12,537	)	(21,107	)
Provision for income taxes	$	(11,622	)	117,673		96,359

Tax Reform

On December 22, 2017, the U.S. federal government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly changes U.S. tax law by, among other things, reducing the corporate income tax rate from 35% to 21% effective January 1, 2018, establishing a territorial-style system for taxing foreign-source income of domestic multinational corporations, and imposing a one-time mandatory transition tax on deemed repatriated earnings of certain foreign joint ventures and subsidiaries. As a result of the Tax Act, the Company recorded a provisional net tax benefit of $143.4 million during fiscal year 2017.

The provisional amount includes a $145.1 million tax benefit for the remeasurement of certain U.S. deferred tax assets and liabilities. In addition, the provisional amount includes a $1.7 million tax expense for the income tax on the deemed repatriation of unremitted foreign earnings, net of estimated foreign tax credits. The provisional net tax benefit was computed based on information currently available to the Company. However, there is still uncertainty as to the application of the Tax Act, including as it relates to state income taxes, because regulations and interpretations have not been released. In addition, certain estimates were used in computing the provisional amount, which will be finalized upon the filing of the Company’s 2017 U.S. federal tax return. As we complete our analysis of U.S. tax reform in fiscal year 2018, we may make adjustments to the provisional amounts, which may impact our provision for income taxes in the period in which the adjustments are made.

The Company expects to elect to pay the liability for the deemed repatriation of foreign earnings with our 2017 tax return. Accordingly, as of December 30, 2017, the liability for the transition tax on deemed repatriation of foreign earnings is included as a reduction to prepaid income taxes in the consolidated balance sheets.

Tax Rate

The provision (benefit) for income taxes differed from the expense computed using the statutory federal income tax rate of 35% due to the following:



	Fiscal year ended
	December 30, 2017		December 31, 2016		December 26, 2015
Computed federal income tax expense, at statutory rate	35.0	%	35.0	%	35.0	%
Impairment of investment in Japan JV	—		—		9.4
State income taxes	5.5		5.1		6.6
Benefits and taxes related to foreign operations	(1.4	)	(2.7	)	(4.4	)
Excess tax benefits	(2.3	)	—		—
Change in valuation allowance	2.6		—		—
Other permanent differences	(0.4	)	0.1		0.6
Impact of Tax Act	(42.3	)	—		—
Other, net	(0.1	)	0.1		0.6
Effective tax rate	(3.4	)%	37.6	%	47.8	%

In addition to the impact of the Tax Act, the Company’s effective tax rate for fiscal year 2017 was impacted by the adoption of new guidance for employee share-based compensation (see note 2(v)), which resulted in the Company recording $7.8 million of excess tax benefits related to share-based compensation within the provision for income taxes.

The effective tax rate for fiscal year 2015 was increased by the impairment of our investment in the Japan JV as a result of the corresponding reduction in income before income taxes but for which there is no corresponding tax benefit.

Deferred Tax Assets and Liabilities

The components of deferred tax assets and liabilities were as follows (in thousands):



	December 30, 2017				December 31, 2016
	Deferred tax assets			Deferred tax liabilities	Deferred tax assets		Deferred tax liabilities
Allowance for doubtful accounts	$	2,013		—	2,685		—
Capital leases	2,158			—	3,295		—
Rent	9,452			—	11,905		—
Property and equipment	375			—	—		1,977
Deferred compensation liabilities	15,033			—	19,900		—
Deferred gift cards and certificates	16,676			—	27,874		—
Deferred income	9,049			—	12,609		—
Real estate reserves	1,153			—	1,264		—
Franchise rights and other intangibles	—			372,988	—		551,679
Unused net operating losses and foreign tax credits	1,912			—	11,457		—
Other current liabilities	4,697			—	5,368		—
Other	224			—	1,758		—
	62,742			372,988	98,115		553,656
Valuation allowance	(899		)	—	(1,131	)	—
Total	$	61,843		372,988	96,984		553,656

Deferred tax assets for certain foreign jurisdictions totaling $4.1 million and $5.1 million as of December 30, 2017 and December 31, 2016, respectively, are included in other assets in the consolidated balance sheets. At December 30, 2017, the Company had net operating loss carryforwards in certain international jurisdictions of approximately $7.5 million, and recorded deferred tax assets of $1.0 million, net of valuation allowance, related to such loss carryforwards.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, and projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes, as of December 30, 2017, with the exception of net operating loss carryforwards attributable to certain of our foreign subsidiaries for which valuation allowances have been recorded, it is more likely than not that the Company will realize the benefits of the deferred tax assets.

In conjunction with the anticipated closing of the debt refinancing transaction and related issuance of the 2017 Notes (see note 8), management assessed the realizability of its unused foreign tax credits as of September 30, 2017 by considering whether it was more likely than not that some portion or all of the unused foreign tax credits would not be realized. The ultimate realization of these unused foreign tax credits is dependent upon the generation of future taxable income available to apply such foreign tax credits prior to their expiration in fiscal years 2021 through 2026. Based upon the level of historical and projected future taxable income over the period prior to expiration, including the incremental interest expense from the 2017 Notes, as of September 30, 2017, management did not believe that it was more likely than not that the Company would realize the benefit of the unused foreign tax credits. As such, a valuation allowance of $8.9 million was recorded to the provision for income taxes during the three months ended September 30, 2017. As a result of the Tax Act, the Company determined it will realize the benefit of the unused foreign tax credits as a reduction to the one-time mandatory transition tax on deemed repatriated earnings. Therefore, the $1.7 million provisional tax expense associated with the one-time mandatory transition tax reflects the reversal of the valuation allowance associated with the unused foreign tax credits.

The Company has not recognized a deferred tax liability of $8.6 million for potential withholding taxes on the undistributed earnings of foreign operations, net of foreign tax credits, relating to our foreign joint ventures that arose in fiscal year 2017 and prior years because the Company currently does not expect those unremitted earnings to be distributed and become taxable to the Company in the foreseeable future. In addition, the previously untaxed accumulated earnings and profits of our joint ventures were subject to tax in the one-time mandatory transition tax provision. A deferred tax liability will be recognized when the Company is no longer able to demonstrate that it plans to indefinitely reinvest undistributed earnings. As of December 30, 2017 and December 31, 2016, the undistributed earnings of these joint ventures were approximately $147.4 million and $132.9 million, respectively.

The Company has not recognized a deferred tax liability for the undistributed earnings of our foreign subsidiaries since the previously untaxed accumulated earnings and profits of those subsidiaries were subject to tax in the one-time mandatory transition tax provision. In addition, such earnings are considered indefinitely reinvested outside the United States. As of December 30, 2017 and December 31, 2016, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $21.7 million and $24.5 million, respectively. If in the future we decide to repatriate such foreign earnings, we could incur incremental U.S. federal and state income tax. However, our intention is to keep these funds indefinitely reinvested outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Unrecognized Tax Benefits

At December 30, 2017 and December 31, 2016, the total amount of unrecognized tax benefits related to uncertain tax positions was $1.5 million and $2.3 million, respectively. At December 30, 2017 and December 31, 2016, the Company had approximately $0.6 million and $1.1 million, respectively, of accrued interest and penalties related to uncertain tax positions. The Company did not record a material amount related to potential interest and penalties for uncertain tax positions during fiscal years 2017, 2016, or 2015. As of December 30, 2017 and December 31, 2016, there was $1.3 million of unrecognized tax benefits that, if recognized, would impact the annual effective tax rate.

The Company’s major tax jurisdictions subject to income tax are the United States and Canada. In the United States, the Company has open tax years dating back to tax years ended December 2014. For Canada, the Company has open tax years dating back to tax years ended December 2011.

A summary of the changes in the Company’s unrecognized tax benefits is as follows (in thousands):



	Fiscal year ended
	December 30, 2017			December 31, 2016		December 26, 2015
Balance at beginning of year	$	2,290		2,653		3,672
Increases related to prior year tax positions	206			267		—
Increases related to current year tax positions	65			161		111
Decreases related to prior year tax positions	(94		)	(33	)	(301	)
Decreases related to settlements	(871		)	(191	)	(636	)
Lapses of statutes of limitations	(140		)	(597	)	—
Effect of foreign currency adjustments	73			30		(193	)
Balance at end of year	$	1,529		2,290		2,653