Income taxes

Cayman Islands

The Company is domiciled in the Cayman Islands. Under the current laws of Cayman Islands, the Company is not subject to tax on income or capital gains. The Company has received this undertaking for a twenty year period ending August 24, 2019, and after the expiration date, the Company can make a request for renewal with the office of the Clerk of the Cabinet for another twenty years.

Income of the Company exempted from corporate income tax in the Cayman Islands amounted to $0, $51,554 and $40,738 in the years ended June 29, 2012, June 24, 2011 and June 25, 2010, respectively.

Thailand

Fabrinet Co., Ltd., the Company’s wholly-owned direct subsidiary, is where the majority of operations and production takes place. The Company is not subject to tax from July 2010 through June 2015 on income generated from the manufacture of products at Pinehurst Building 5 and from July 2012 through June 2020 on income generated from the manufacture of products at Pinehurst Building 6. In addition, on December 21, 2011, the Thailand Revenue Department announced a reduction in corporate income tax rates for tax periods beginning on or after January 1, 2012. As a result of the announcement, enacted corporate income tax rates for the Company’s subsidiary in Thailand will be reduced from 30% in fiscal 2012 to 23%, 20% and 20% in fiscal 2013, fiscal 2014 and fiscal 2015, respectively. As a result of this change, the Company’s deferred tax balance and income tax expense decreased by a net amount of $121 during fiscal 2012.

People’s Republic of China

Effective October 21, 2011, CASIX, the Company’s wholly owned indirect subsidiary in China, was granted a tax privilege to reduce its corporate income tax rate from 25% to 15%. This privilege is retroactive to January 1, 2011 and valid until December 31, 2013, subject to renewal at the end of each three-year period. As a result of this change, deferred tax assets have decreased by $500, deferred tax liabilities decreased by $106, income tax payable decreased by $697, and income tax expense decreased by $303 ($0.01 per share) during fiscal 2012.

The Group’s income tax expense consisted of the following:


	Year Ended
	June 29, 2012			June 24, 2011			June 25, 2010
Current	$	282		$	5,168		$	4,304
Deferred		(2,250	)		(633	)		(537	)

Total income tax (benefit) expense	$	(1,968	)	$	4,535		$	3,767

The reconciliation between the Group’s taxes that would arise by applying the basic tax rate of the country of the Group’s principal operations, Thailand, to the Group’s effective tax charge is shown below:


	Year Ended
	June 29, 2012			June 24, 2011			June 25, 2010
(Loss) income before income taxes	$	(58,435	)	$	68,864		$	48,090
Tax calculated at a corporate income tax rate of 30%		(17,531	)		20,659			14,427
Effect of income taxes from locations with tax rates different from Thailand		(551	)		(334	)		(189	)
Loss (income) not subject to tax *		15,240			(15,986	)		(10,674	)
Income tax on unremitted earnings		552			472			107
Effect of tax rate change		1,263			—			—
Effect of foreign exchange rate adjustment		(993	)		95			—
Others		52			(371	)		96

Corporate income tax (benefit) expense	$	(1,968	)	$	4,535		$	3,767

Income not subject to taxes relates to income earned in the Cayman Islands and income subject to investment promotion privilege for Building 5, from July 2010 through June 2015. Income not subject to tax per ordinary share on a diluted basis (in dollars) was $(0.44), $0.46 and $0.34 for the years ended June 29, 2012, June 24, 2011 and June 25, 2010, respectively.

As of June 29, 2012, there were tax losses of $2,456 carried forward due to severe flooding in Thailand during October and November 2011. These tax loss carryforwards expire in fiscal 2017.

The Group’s deferred tax assets and deferred tax liabilities at each balance sheet date are as follows:


	Year Ended
	June 29, 2012		June 24, 2011
Deferred tax assets:
Depreciation	$	1,353	$	1,408
Severance liability		668		566
Reserve and allowance		616		1,126
Allowance for tax loss carried forward		2,456		—
Non-deductible flood loss expenses		793		—
Others		36		253

Total deferred tax assets	$	5,922	$	3,353


	Year Ended
	June 29, 2012			June 24, 2011
Deferred tax liabilities:
Deferred cost of service and expense		(54	)		(68	)
Others		(16	)		(24	)

Total deferred tax liabilities	$	(70	)	$	(92	)

Net deferred tax assets	$	5,852		$	3,261

Current deferred income tax assets and liabilities and non-current deferred income tax assets and liabilities are offset when the income taxes relate to the same tax jurisdiction. The following amounts are shown in the consolidated balance sheets:


	Year Ended
	June 29, 2012			June 24, 2011
Deferred income tax assets — current	$	4,146		$	1,382
Deferred income tax liabilities — current		(58	)		(74	)

Current deferred income tax — net		4,088			1,308

Deferred income tax assets — non current		1,777			1,971
Deferred income tax liabilities — non current		(13	)		(18	)

Non current deferred income tax — net		1,764			1,953

Net deferred income tax assets	$	5,852		$	3,261

Income tax liabilities have not been established for withholding tax and other taxes that would be payable on the unremitted earnings of Fabrinet Thailand. Such amounts of Fabrinet Thailand are permanently reinvested; unremitted earnings for Fabrinet Thailand totaled $11,443 and $21,046 as of June 29, 2012 and June 24, 2011, respectively. Unrecognized deferred tax liabilities for such unremitted earnings were $980 and $2,265 as of June 29, 2012 and June 24, 2011, respectively.

Deferred tax liabilities of $1,405 and $1,056 have been established for withholding tax on the unremitted earnings of CASIX as of June 29, 2012 and June 24, 2011, respectively.

Uncertain income tax positions

Interest and penalties related to uncertain tax positions are recognized in income tax expense. The Company had approximately $781 and $579 of accrued interest and penalties related to uncertain tax positions on the consolidated balance sheets as of June 29, 2012 and June 24, 2011, respectively. The Company recorded (reversed) interest and penalties of $202, $(141) and $(73) for the years ended June 29, 2012, June 24, 2011 and June 25, 2010, respectively, through the consolidated statements of operations. With regard to the Thailand jurisdiction, tax years 2007 through 2011 remain open to examination by the local authorities.

The following table indicates the changes to the Company’s unrecognized tax benefits for the years ended June 29, 2012, June 24, 2011 and June 25, 2010 included in other non-current liabilities.


	June 29, 2012		June 24, 2011			June 25, 2010
Beginning balance	$	1,124	$	1,540		$	1,551
Additions during the year		—		—			—
Additions for tax positions of prior years		—		—			450
Reductions for tax positions of prior years		—		(416	)		(461	)

Ending balance	$	1,124	$	1,124		$	1,540