15. Income Taxes

Significant components of the income tax expense (benefit) were as follows:

	Fiscal
	2016			2015			2014
	(in millions)
Current income tax expense (benefit):
U.S.:
Federal	$	(1,115	)	$	(67	)	$	128
State		(163	)		12			(3	)
Non-U.S.		321			352			302

		(957	)		297			427

Deferred income tax expense (benefit):
U.S.:
Federal		173			87			(311	)
State		20			5			(3	)
Non-U.S.		(15	)		(52	)		33

		178			40			(281	)

Income tax expense (benefit)	$	(779	)	$	337		$	146

The U.S. and non-U.S. components of income from continuing operations before income taxes were as follows:

	Fiscal
	2016			2015			2014
	(in millions)
U.S.	$	(115	)	$	(31	)	$	(133	)
Non-U.S.		1,277			1,606			1,893

Income from continuing operations before income taxes	$	1,162		$	1,575		$	1,760

The reconciliation between U.S. federal income taxes at the statutory rate and income tax expense (benefit) was as follows:

	Fiscal
	2016			2015			2014
	(in millions)
Notional U.S. federal income tax expense at the statutory rate	$	407		$	551		$	616
Adjustments to reconcile to the income tax expense (benefit):
U.S. state income tax expense (benefit), net		(93	)		11			(4	)
Other (income) expense—Tax Sharing Agreement(1)		221			18			(23	)
Tax law changes		(3	)		10			(1	)
Tax credits		(10	)		(9	)		(8	)
Non-U.S. net earnings(2)		(342	)		(275	)		(287	)
Nondeductible charges		2			2			3
Change in accrued income tax liabilities		(1,056	)		(183	)		112
Valuation allowance		97			(3	)		(239	)
Legal entity restructuring		39			211			—
Divestitures		(31	)		—			—
Other		(10	)		4			(23	)

Income tax expense (benefit)	$	(779	)	$	337		$	146


(1)	Other income (expense), net pursuant to the Tax Sharing Agreement with Tyco International and Covidien is not taxable or deductible.
(2)	Excludes nondeductible charges and other items which are separately presented.

The income tax benefit for fiscal 2016 included a $1,135 million income tax benefit related to the effective settlement of tax matters for the years 1997 through 2000 which resolved all aspects of the disputed debt matter with the IRS through the year 2007, partially offset by a $91 million income tax charge related to an increase to the valuation allowance for certain U.S. deferred tax assets. Additionally, the tax benefit for fiscal 2016 included an $83 million net income tax benefit related to tax settlements in certain other tax jurisdictions, partially offset by an income tax charge related to certain legal entity restructurings. See Note 12 for additional information regarding settlements with the IRS.

The increase to the valuation allowance for deferred tax assets primarily relates to certain U.S. federal and state tax loss and credit carryforwards. Based on our forecast of taxable income for certain U.S. tax reporting groups, U.S. tax loss and credit carryforwards finalized as a result of settlement of the disputed debt matter with the IRS, and certain tax planning actions and strategies, we believed it was more likely than not that a portion of our deferred tax assets would not be realized.

The income tax expense for fiscal 2015 included a $264 million income tax benefit related to the effective settlement of all undisputed tax matters for the years 2001 through 2010, partially offset by a $216 million income tax charge associated with the tax impacts of certain intercompany legal entity restructurings made in connection with our integration of Measurement Specialties. Also, income tax expense for fiscal 2015 included an income tax charge of $29 million associated with the tax impacts of certain intercompany dividends related to the restructuring and sale of BNS.

The income tax expense for fiscal 2014 included an income tax benefit of $282 million recognized in connection with a reduction in the valuation allowance associated with certain tax loss carryforwards relating to ADC Telecommunications, Inc. ("ADC"), partially offset by an income tax charge related to adjustments to prior year income tax returns.

In fiscal 2014, we acquired SEACON, and its U.S. operations were combined with our ADC U.S. federal consolidated tax group. In addition, the ADC U.S. tax group was combined with other U.S. legal entities and assets. We reassessed the realization of the revised ADC U.S. tax group's tax loss and credit carryforwards. Based on our forecast of taxable income of the reorganized combined tax group, we believed it was more likely than not that a tax benefit would be realized on additional U.S. federal and state net operating losses. Accordingly, we reduced the valuation allowance and recorded a tax benefit of $282 million.

Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax asset were as follows:

	Fiscal Year End
	2016			2015
	(in millions)
Deferred tax assets:
Accrued liabilities and reserves	$	286		$	262
Tax loss and credit carryforwards		4,656			4,856
Inventories		46			57
Pension and postretirement benefits		349			295
Deferred revenue		11			17
Interest		470			394
Unrecognized income tax benefits		10			378
Other		32			4

		5,860			6,263

Deferred tax liabilities:
Intangible assets		(761	)		(809	)
Property, plant, and equipment		(15	)		(1	)
Other		(84	)		(89	)

		(860	)		(899	)

Net deferred tax asset before valuation allowance		5,000			5,364
Valuation allowance		(3,096	)		(3,237	)

Net deferred tax asset	$	1,904		$	2,127

Our tax loss and credit carryforwards (tax effected) at fiscal year end 2016 were as follows:

	Expiration Period
	Through 2021		Fiscal 2022 Through 2036		No Expiration		Total
	(in millions)
U.S. Federal:
Net operating loss carryforwards	$	—	$	1,404	$	—	$	1,404
Tax credit carryforwards		15		124		70		209
Capital loss carryforwards		36		—		—		36
U.S. State:
Net operating loss carryforwards.		53		55		—		108
Tax credit carryforwards		12		15		7		34
Non-U.S.:
Net operating loss carryforwards		12		5		2,813		2,830
Tax credit carryforwards		—		1		—		1
Capital loss carryforwards		7		—		27		34

Total tax loss and credit carryforwards	$	135	$	1,604	$	2,917	$	4,656

The valuation allowance for deferred tax assets of $3,096 million and $3,237 million at fiscal year end 2016 and 2015, respectively, relates principally to the uncertainty of the utilization of certain deferred tax assets, primarily tax loss, capital loss, and credit carryforwards in various jurisdictions. We believe that we will generate sufficient future taxable income to realize the income tax benefits related to the remaining net deferred tax assets on the Consolidated Balance Sheet. At fiscal year end 2016, approximately $169 million of the valuation allowance relates to share-based compensation and will be recorded to equity if certain net operating losses and tax credit carryforwards are utilized.

We have provided income taxes for earnings that are currently distributed as well as the taxes associated with several subsidiaries' earnings that are expected to be distributed in the future. No additional provision has been made for Swiss or non-Swiss income taxes on the undistributed earnings of subsidiaries or for unrecognized deferred tax liabilities for temporary differences related to basis differences in investments in subsidiaries, as such earnings are expected to be permanently reinvested, the investments are essentially permanent in duration, or we have concluded that no additional tax liability will arise as a result of the distribution of such earnings. As of fiscal year end 2016, certain subsidiaries had approximately $21 billion of cumulative undistributed earnings that have been retained indefinitely and reinvested in our global manufacturing operations, including working capital; property, plant, and equipment; intangible assets; and research and development activities. A liability could arise if our intention to permanently reinvest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed. It is not practicable to estimate the additional income taxes related to permanently reinvested earnings or the basis differences related to investments in subsidiaries. As of fiscal year end 2016, we had approximately $6.9 billion of cash, cash equivalents, and intercompany deposits, principally in our subsidiaries, that we have the ability to distribute to TEGSA, our Luxembourg subsidiary, which is the obligor of substantially all of our debt, and to TE Connectivity Ltd., our Swiss parent company, but we consider to be permanently reinvested. We estimate that up to approximately $1.5 billion of tax expense would be recognized on the Consolidated Financial Statements if our intention to permanently reinvest these amounts were to change. Our current plans do not demonstrate a need to repatriate cash, cash equivalents, and intercompany deposits that are designated as permanently reinvested in order to fund our operations, including investing and financing activities.

Uncertain Tax Position Provisions of ASC 740

As of fiscal year end 2016, we had total unrecognized income tax benefits of $490 million. If recognized in future years, $370 million of these currently unrecognized income tax benefits would impact income tax expense (benefit) and the effective tax rate. As of fiscal year end 2015, we had total unrecognized income tax benefits of $1,368 million. If recognized in future years, $1,291 million of these unrecognized income tax benefits would impact income tax expense (benefit) and the effective tax rate. The following table summarizes the activity related to unrecognized income tax benefits:

	Fiscal
	2016			2015			2014
	(in millions)
Balance at beginning of fiscal year	$	1,368		$	1,595		$	1,617
Additions related to prior periods tax positions		75			24			22
Reductions related to prior periods tax positions		(817	)		(291	)		(57	)
Additions related to current period tax positions		124			97			32
Acquisitions		4			—			7
Settlements		(205	)		(29	)		(14	)
Reductions due to lapse of applicable statute of limitations		(59	)		(28	)		(12	)

Balance at end of fiscal year	$	490		$	1,368		$	1,595

We record accrued interest as well as penalties related to uncertain tax positions as part of income tax expense (benefit). As of fiscal year end 2016 and 2015, we had $54 million and $1,076 million, respectively, of accrued interest and penalties related to uncertain tax positions on the Consolidated Balance Sheets, recorded primarily in income taxes. The decrease in the accrued interest and penalties from fiscal year end 2015 was due primarily to the effective settlement of tax matters for the years 1997 through 2000 which resolved all aspects of the disputed debt matter with the IRS through the year 2007. During fiscal 2016, 2015, and 2014, we recognized income tax benefits of $765 million, expense of $7 million, and expense of $99 million, respectively, related to interest and penalties on the Consolidated Statements of Operations.

We file income tax returns on a unitary, consolidated, or stand-alone basis in multiple state and local jurisdictions, which generally have statutes of limitations ranging from 3 to 4 years. Various state and local income tax returns are currently in the process of examination or administrative appeal.

Our non-U.S. subsidiaries file income tax returns in the countries in which they have operations. Generally, these countries have statutes of limitations ranging from 3 to 10 years. Various non-U.S. subsidiary income tax returns are currently in the process of examination by taxing authorities.

As of fiscal year end 2016, under applicable statutes, the following tax years remained subject to examination in the major tax jurisdictions indicated:

Jurisdiction	Open Years
China		2006 through 2016
Czech Republic		2013 through 2016
Germany		2013 through 2016
Hong Kong		2010 through 2016
Ireland		2011 through 2016
Italy		2010 through 2016
Japan		2010 through 2016
Korea		2011 through 2016
Luxembourg		2011 through 2016
Netherlands		2012 through 2016
Singapore		2011 through 2016
Spain		2012 through 2016
Switzerland		2011 through 2016
United Kingdom		2015 through 2016
U.S.—federal and state and local		1998 through 2016

In most jurisdictions, taxing authorities retain the ability to review prior tax years and to adjust any net operating loss and tax credit carryforwards from these years that are utilized in a subsequent period.

Although it is difficult to predict the timing or results of our worldwide examinations, we estimate that up to approximately $90 million of unrecognized income tax benefits, excluding the impact relating to accrued interest and penalties, could be resolved within the next twelve months.

We are not aware of any other matters that would result in significant changes to the amount of unrecognized income tax benefits reflected on the Consolidated Balance Sheet as of fiscal year end 2016.