Note 6 Income Taxes

Pretax income (loss) was generated from the following sources for each of the three fiscal years in the period ended October 1, 2017 (amounts in millions):



	2017			2016			2015
Domestic	$	(110.4	)	$	(112.5	)	$	(14.9	)
Foreign	246.5			87.1			111.8
Total	$	136.1		$	(25.4	)	$	96.9

The provision for (benefit from) income taxes consisted of the following components for each of the three fiscal years in the period ended October 1, 2017 (amounts in millions):



	2017			2016			2015
Current:
Federal	$	0.8		$	—		$	—
State	0.6			0.2			0.2
Foreign	12.2			4.3			4.2
Deferred:
Federal	2.5			4.1			4.6
State	0.4			0.2			—
Foreign	(56.7		)	(1.6		)	3.3
	$	(40.2	)	$	7.2		$	12.3

We recorded a benefit from income taxes of $40.2 million on pretax income of $136.1 million in 2017 compared to a provision for income taxes of $7.2 million on pretax loss of $25.4 million in 2016 and a provision for income taxes of $12.3 million on pretax income of $96.9 million in 2015. For each of these years, the benefit from or provisions for income taxes were primarily due to the tax provision on profitable entities in foreign jurisdictions and U.S. tax provision relating to deferred tax liabilities that will not provide future sources of income to realize deferred tax assets. The tax provisions were offset by tax benefits related to the release of valuation allowances and the reversal of certain deferred tax liabilities. We had cumulative operating losses for the three years ended in 2017 for our U.S. operations and several foreign operations and have provided a full valuation allowance accordingly on certain of our U.S. and foreign net deferred tax assets as we have determined that it is more likely than not that the tax benefits will not be realized in the future.

Our valuation allowance decreased $77.2 million in 2017 and increased $205.9 million in 2016. The 2017 decrease was primarily due to the releases of domestic and certain foreign valuation allowances and the remeasurement of deferred tax liabilities, and the 2016 increase was primarily due to increases in net deferred tax assets from operations and acquisitions that are not more likely than not realizable.

We have federal and state net operating losses ("NOLs") of $526.2 million and $730.3 million, respectively, that both begin expiring in 2018. We have foreign NOLs of approximately $144.3 million that begin expiring in 2018. We have federal and state research and experimentation credits of $103.4 million and $98.5 million, respectively, that both begin expiring in 2018. We have foreign research and experimentation credits of approximately $116.9 million that begin expiring in 2018 and incentive deductions of $34.2 million that carry forward indefinitely. We have federal foreign tax credits of approximately $34.5 million that begin expiring in 2018. We have federal and state enterprise zone credits and federal and state investment tax credits totaling approximately $1.9 million that begin expiring in 2018. We have federal alternative minimum tax credits of approximately $11.2 million that carry forward indefinitely. We have federal and state capital loss carry forwards of $0.6 million each that both begin expiring in 2019. The utilization of NOLs and credits acquired through an acquisition may be subject to limitations due to change in control.

No provision has been made for income taxes on undistributed earnings of certain foreign operations since they have been indefinitely reinvested in those operations (except for insignificant jurisdictions). Determination of the amount of unrecognized deferred tax liability for temporary differences related to these undistributed earnings is not practicable, as such liability is dependent upon a number of factors, including foreign tax credit position that would exist at the time any remittance would occur. During 2017, we reviewed our current cash position and anticipated cash needs for strategic investments in our core business, including accelerated principal payments on certain outstanding debt. Accordingly, in the current year, we continue to reinvest prior year earnings, but changed our assertion to only reinvest current year earnings from certain foreign jurisdictions. At the end of 2017 and 2016, these undistributed earnings aggregated approximately $904.3 million and $793.8 million, respectively.

We have been granted a tax holiday in our subsidiary in Malaysia that has the effect of reducing its net income tax rate to zero in that jurisdiction. The tax holiday was granted in 2009 and is effective through December 2019, subject to continued compliance with the tax holiday's requirements.

The following is a reconciliation of income tax computed at the federal statutory rate to our actual tax expense for each of the three fiscal years in the period ended October 1, 2017 (amounts in millions):



	2017			2016			2015
Tax computed at federal statutory rate	$	47.6		$	(8.9	)	$	33.9
State taxes, net of federal impact	0.5			0.5			(2.1		)
Foreign income taxed at different rates	(78.5		)	(7.0		)	(33.1		)
Tax credits and incentives	(8.8		)	(10.7		)	(5.1		)
Stock award compensation	(13.9		)	(4.6		)	1.3
Unrecognized tax benefits	11.4			30.6			3.7
Sale/transfer of assets	5.6			(45.6		)	—
U.S. tax on foreign income	54.7			2.0			1.3
Non-deductible permanent items	—			6.2			0.9
Expiration of tax attributes	20.0			5.0			—
Investment in foreign subsidiaries	(0.2		)	2.7			(0.5		)
Withholding taxes	—			1.1			(0.3		)
Deferred tax remeasurement	(4.0		)	—			—
Other differences, net	2.6			0.6			(1.0		)
Valuation allowance	(77.2		)	35.3			13.3
	$	(40.2	)	$	7.2		$	12.3

The tax effected deferred tax assets (liabilities) are comprised of the following components (amounts in millions):



	October 1, 2017			October 2, 2016
Accounts receivable, net	$	2.3		$	2.1
Inventories	23.5			18.8
Accrued employee benefit expenses	4.0			10.0
Net operating losses	136.5			216.1
Tax credits and incentives	236.4			238.0
Accrued other expenses	16.0			10.3
Deferred equity compensation	20.7			20.0
Property and equipment, net	6.6			4.4
Debt issuance costs	17.3			20.9
Other assets	12.7			12.3
Total deferred tax assets	476.0			552.9
Intangible assets	(131.1		)	(176.8		)
Investment in foreign subsidiaries	(2.3		)	(2.5		)
Total deferred tax liabilities	(133.4		)	(179.3		)
Less valuation allowance	(379.2		)	(456.4		)
	$	(36.6	)	$	(82.8	)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in millions):



	October 1, 2017			October 2, 2016			September 27, 2015
Beginning gross unrecognized tax benefits	$	319.0		$	121.8		$	97.7
Additions based on tax positions related to the current year	21.8			33.1			3.5
Additions based on current year acquisitions	0.4			132.6			16.2
Additions based on tax positions of prior years	3.4			36.3			4.8
Reductions based on tax positions of prior years	(65.9		)	—			—
Reductions for lapses and settlements	(0.2		)	(4.8		)	(0.4		)
Ending gross unrecognized tax benefit	$	278.5		$	319.0		$	121.8

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. During the year ended October 1, 2017, we recorded a net reversal of $4.2 million in interest and penalties and during the years ended October 2, 2016, and September 27, 2015, we recognized $3.7 million and $0.7 million, respectively in interest and penalties. The cumulative interest and penalties at October 1, 2017 and October 2, 2016 were $38.0 million and $42.2 million, respectively.

Unrecognized tax benefits of $107.4 million, including interest, at October 1, 2017 would impact the effective tax rate if recognized after the valuation allowance has been released. We anticipate a decrease in gross unrecognized tax benefits of approximately $18.0 million within the next twelve months based on federal, state, and foreign expirations in various jurisdictions.

We file U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax years 2007 to 2016 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, 2007 to 2016 generally remain subject to examination by tax authorities. We establish liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, international tax issues and certain tax credits. We are currently undergoing an Internal Revenue Service examination for tax years 2007 through 2014. There have been no significant proposed adjustments to date. As of October 1, 2017, the IRS has raised questions primarily relating to transfer pricing. The Company is also currently under tax audit by the Canada Revenue Agency ("CRA") for tax years 2007 through 2008 and 2010 through 2015. The Company closed the CRA audit for tax years 2009 through 2010 in the current year with no changes to the tax as originally reported. As of October 1, 2017, the CRA has raised questions primarily relating to transfer pricing. The Company is also currently under tax audit by the Indian Tax Authorities ("ITA") for tax years 2006 through 2014. The ITA has raised questions primarily related to transfer pricing. Management believes that the Company's position is appropriate and that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in the Company's tax examinations are resolved in a manner not consistent with management's expectations, the Company would be required to adjust its provision for income tax in the period such resolution occurs. While the Company believes its reported results are accurate, any significant adjustments could have a material adverse effect on the Company's results of operations, cash flows and financial position if not resolved within expectations.