INCOME TAXES

The provisions for current and deferred income taxes are summarized as follows:



	2017		2016			2015

	(In millions)
Current:
United States	$	117	$	(36	)	$	114
International	9		6			1
State and local	6		(11		)	8
	132		(41		)	123
Deferred:
United States	126		279			(21		)
International	1		(3		)	8
State and local	8		38			(1		)
	135		314			(14		)
	$	267	$	273		$	109

The total income tax provision is summarized as follows:



	2017			2016			2015

	(In millions)
Continuing operations	$	267		$	273		$	109
Discontinued operations	(110		)	(12		)	34
Total income tax provision	$	157		$	261		$	143

The components of deferred income tax assets (liabilities) were as follows:



	June 30, 2017			July 1, 2016

	(In millions)
Deferred tax assets:
Inventory valuations	$	31		$	32
Accruals	292			271
Deferred revenue	16			23
Domestic tax loss and credit carryforwards	60			43
International tax loss and credit carryforwards	35			32
Share-based compensation	31			29
Capital loss carryforwards	133			212
Long-term debt	13			16
Pension and other post-employment benefits	509			849
Unrealized loss on interest rate hedges	10			11
Unrecognized tax benefits	7			14
Other	(17		)	(8		)
Total deferred tax assets	1,120			1,524
Less: valuation allowance ⁽¹⁾	(183		)	(271		)
Total deferred tax assets, net of valuation allowance	937			1,253

Deferred tax liabilities:
Property, plant and equipment	(51		)	(66		)
Unbilled receivables	(5		)	(31		)
Acquired intangibles	(459		)	(559		)
Unremitted earnings of foreign subsidiaries	(47		)	(52		)
Total deferred tax liabilities	(562		)	(708		)
Total deferred tax assets, net of valuation allowance	$	375		$	545

(1) The valuation allowance has been established to offset certain domestic and foreign deferred tax assets due to uncertainty regarding our ability to realize them in the future.

A reconciliation of the United States statutory income tax rate to our effective income tax rate follows:



	2017		2016		2015
U.S. statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes	1.0		1.8		0.6
International income	(1.3	)	(1.2	)	(3.2	)
Nondeductible goodwill	—		0.9		2.2
Research and development tax credit	(2.0	)	(2.3	)	(2.1	)
Change in valuation allowance	(0.2	)	(2.6	)	—
U.S. production activity benefit	(0.5	)	(0.4	)	(3.8	)
Adoption of stock-based compensation ASU	(2.6	)	—		—
Cash repatriation	—		—		1.7
Settlement of tax audits	—		(0.3	)	(2.1	)
Other items	0.1		—		(0.8	)
Effective income tax rate	29.5	%	30.9	%	27.5	%

State and local income taxes allocable to certain U.S. Government contracts are included in our operating expenses and, therefore, are not included in our provision for income taxes. We have made no provision for U.S. income taxes on $62 million of undistributed earnings of international subsidiaries because of our intention to reinvest those earnings indefinitely. Determination of unrecognized deferred U.S. tax liability for the undistributed earnings of international subsidiaries is not practicable. Tax loss and credit carryforwards as of June 30, 2017 have expiration dates ranging between one year and no expiration in certain instances. The amounts of federal, international and state and local operating loss carryforwards as of June 30, 2017 were $23 million, $69 million and $334 million, respectively. The amount of U.S. capital loss carryforwards as of June 30, 2017 was $335 million. Income from continuing operations before income taxes of international subsidiaries was $42 million, $42 million and $31 million in fiscal 2017, 2016 and 2015, respectively. Income taxes paid were $51 million, $53 million and $131 million in fiscal 2017, 2016 and 2015, respectively.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



	2017			2016			2015

	(In millions)
Balance at beginning of fiscal year	$	63		$	124		$	72
Additions based on tax positions taken during current fiscal year	52			7			5
Additions based on tax positions taken during prior fiscal years	—			9			5
Additions for tax positions related to acquired entities	—			—			68
Decreases based on tax positions taken during prior fiscal years	(25		)	(73		)	(8		)
Decreases from lapse in statutes of limitations	—			(1		)	(1		)
Decreases from settlements	—			(3		)	(17		)
Balance at end of fiscal year	$	90		$	63		$	124

As of June 30, 2017, we had $90 million of unrecognized tax benefits, of which $74 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized. Upon recognition of a portion of these benefits, we also expect to recognize an additional $14 million of current expense which will offset the favorable rate impact from the unrecognized tax benefits. As of July 1, 2016, we had $63 million of unrecognized tax benefits, of which $23 million would favorably impact our future tax rates in the event that the tax benefits are eventually recognized and $16 million was reversed through discontinued operations in fiscal 2017.

We recognize accrued interest and penalties related to unrecognized tax benefits as part of our income tax expense. We had accrued $5 million for the potential payment of interest and penalties as of June 30, 2017 (and this amount was not included in the $90 million of unrecognized tax benefits balance at June 30, 2017 shown above) and $3 million of this total could favorably impact future tax rates. We had accrued $13 million for the potential payment of interest and penalties as of July 1, 2016 (and this amount was not included in the $63 million of unrecognized tax benefits balance at July 1, 2016 shown above) and $11 million of this total could favorably impact future tax rates.

We file numerous separate and consolidated income tax returns reporting our financial results and, where appropriate, those of our subsidiaries and affiliates, in the U.S. Federal jurisdiction and various state, local and foreign jurisdictions. Pursuant to the Compliance Assurance Process, the IRS is examining our returns for fiscal 2010 through fiscal 2014 and fiscal 2016 through fiscal 2017. The Canadian Revenue Agency is currently examining our returns for fiscal 2007 through fiscal 2010, and we are appealing portions of a Canadian assessment relating to fiscal 2000 through fiscal 2006. We are currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2006 through 2016. It is reasonably possible that there could be a significant decrease or increase to our unrecognized tax benefit balance during the course of the next twelve months as these examinations continue, other tax examinations commence or various statutes of limitations expire. An estimate of the range of possible changes cannot be made for remaining unrecognized tax benefits because of the significant number of jurisdictions in which we do business and the number of open tax periods.