INCOME TAXES

Income before income taxes consists of the following components (in thousands):



	Fiscal Years Ended
	September 28, 2012		September 30, 2011		October 1, 2010
United States	$	113,140	$	208,926	$	164,094
Foreign	141,836		84,960		30,980
Income before income taxes	$	254,976	$	293,886	$	195,074

The provision for income taxes consists of the following (in thousands):



	Fiscal Years Ended
	September 28, 2012			September 30, 2011			October 1, 2010
Current tax expense (benefit):
Federal	$	32,414		$	25,421		$	11,855
State	(1,741		)	422			946
Foreign	8,623			4,340			684
	39,296			30,183			13,485
Deferred tax expense (benefit):
Federal	12,998			35,053			44,072
State	(3,670		)	(1,048		)	(2,846		)
Foreign	405			961			235
	9,733			34,966			41,461

Change in valuation allowance	3,869			2,152			2,834
Provision for income taxes	$	52,898		$	67,301		$	57,780

The actual income tax expense is different than that which would have been computed by applying the federal statutory tax rate to income before income taxes. A reconciliation of income tax expense as computed at the United States federal statutory income tax rate to the provision for income tax expense follows (in thousands):



	Fiscal Years Ended
	September 28, 2012			September 30, 2011			October 1, 2010
Tax expense at United States statutory rate	$	89,241		$	102,860		$	68,276
Foreign tax rate difference	(44,733		)	(24,394		)	(8,889		)
Deemed dividend from foreign subsidiary	2,446			43			884
Research and development credits	(1,689		)	(17,720		)	(5,820		)
Change in tax reserve	10,419			9,405			4,413
Change in valuation allowance	3,869			2,152			2,834
Non deductible debt retirement premium	—			—			64
Domestic production activities deduction	(3,923		)	(6,055		)	(2,263		)
International restructuring	—			—			(3,468		)
Other, net	(2,732		)	1,010			1,749
Provision for income taxes	$	52,898		$	67,301		$	57,780

The Company operates in foreign jurisdictions with income tax rates lower than the United States tax rate of 35%. The Company's tax benefits related to foreign earnings taxed at a rate less than the United States federal rate were $44.7 million and $24.4 million as of September 28, 2012 and September 30, 2011, respectively.

As of September 28, 2012, the United States Congress has not taken action to extend the federal tax credit available under the Internal Revenue Code for research and development. Accordingly, the income tax provision for the year ended September 28, 2012 does not include the impact of such research and development tax credits earned after December 31, 2011.

On October 2, 2010, the Company expanded its presence in Asia by launching operations in Singapore. The Company operates under a tax holiday in Singapore, which is effective through September 30, 2020. The tax holiday is conditional upon the Company's compliance in meeting certain employment and investment thresholds in Singapore. The impact of the tax holiday decreased Singapore's taxes by $5.9 million which resulted in a benefit of $0.03 of basic and diluted earnings per share for the fiscal year ended September 28, 2012. The impact of the tax holiday to fiscal 2011 was not material.

As a result of the enactment of the Tax Relief Act of 2010 which retroactively reinstated and extended the research and development tax credit, $6.2 million of federal research and development tax credits which were earned in fiscal year 2010 reduced our tax rate during the year ended September 30, 2011.

During fiscal year 2010, the Company restructured its international operations resulting in a tax benefit of $3.5 million. This consisted of a tax benefit of $6.3 million due to reassessing the United States income tax required to be recorded on earnings of our operations in Mexico, offset by $2.8 million of tax provision related to the transfer of assets to an affiliated foreign company. As a result of this restructuring, the Company is no longer required to assess United States income tax on the earnings of its Mexican business.

Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in thousands):



	Fiscal Years Ended
	September 28, 2012			September 30, 2011
Deferred Tax Assets:
Current:
Inventory	$	5,293		$	4,181
Bad debts	170			162
Accrued compensation and benefits	4,041			3,946
Product returns, allowances and warranty	1,916			1,222
Restructuring	606			515
Other – net	520			998
Current deferred tax assets	12,546			11,024
Less valuation allowance	(3,162		)	(2,431		)
Net current deferred tax assets	9,384			8,593
Long-term:
Intangible assets	6,638			7,660
Share-based and other deferred compensation	37,601			27,921
Net operating loss carry forwards	35,809			22,143
Federal tax credits	17,199			37,717
State tax credits	33,628			26,111
Other - net	1,785			—
Long-term deferred tax assets	132,660			121,552
Less valuation allowance	(43,791		)	(36,943		)
Net long-term deferred tax assets	88,869			84,609

Deferred tax assets	145,206			132,576
Less valuation allowance	(46,953		)	(39,374		)
Net deferred tax assets	98,253			93,202
Deferred Tax Liabilities:
Current:
Prepaid insurance	(894		)	(723		)
Current deferred tax liabilities	(894		)	(723		)
Long-term:
Property, plant and equipment	(17,567		)	(18,084		)
Other – net	(3		)	(208		)
Intangible assets	(6,157		)	(5,943		)
Long-term deferred tax liabilities	(23,727		)	(24,235		)

Net deferred tax liabilities	(24,621		)	(24,958		)
Total deferred tax assets	$	73,632		$	68,244

In accordance with GAAP, management has determined that it is more likely than not that a portion of its historic and current year income tax benefits will not be realized. As of September 28, 2012, the Company has maintained a valuation allowance of $47.0 million. This valuation allowance is comprised of $33.6 million related to U.S. State tax credits, of which $3.6 million are state tax credits acquired from AATI in fiscal year 2012, and $13.4 million related to foreign deferred tax assets. If these benefits are recognized in a future period the valuation allowance on deferred tax assets will be reversed and up to a $46.6 million income tax benefit, and up to a $0.4 million reduction to goodwill may be recognized. The Company will need to generate $209.0 million of future United States federal taxable income to utilize our United States deferred tax assets as of September 28, 2012.

Deferred tax assets are recognized for foreign operations when management believes it is more likely than not that the deferred tax assets will be recovered during the carry forward period. The Company will continue to assess its valuation allowance in future periods.

As of September 28, 2012, the Company has United States federal net operating loss carry forwards of approximately $74.3 million, including $29.5 million related to the acquisition of SiGe, which will expire at various dates through 2030 and $28.1 million related to the acquisition of AATI, which will expire at various dates through 2031. The utilization of these net operating losses is subject to certain annual limitations as required under Internal Revenue Code section 382 and similar state income tax provisions. The Company also has United States federal income tax credit carry forwards of $37.8 million, of which $30.4 million of federal income tax credit carry forwards have not been recorded as a deferred tax asset. The Company also has state income tax credit carry forwards of $33.6 million, for which the Company has provided a valuation allowance. The United States federal tax credits expire at various dates through 2032. The state tax credits relate primarily to California research tax credits which can be carried forward indefinitely.

The Company has continued to expand its operations and increase its investments in numerous international jurisdictions. These activities will increase the Company’s earnings attributable to foreign jurisdictions. As of September 28, 2012, no provision has been made for United States federal, state, or additional foreign income taxes related to approximately $371.5 million of undistributed earnings of foreign subsidiaries which have been or are intended to be permanently reinvested. It is not practicable to determine the United States federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested.

The Company’s gross unrecognized tax benefits totaled $52.4 million and $32.1 million as of September 28, 2012 and September 30, 2011, respectively. Of the total unrecognized tax benefits at September 28, 2012, $38.8 million would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company’s valuation allowance and certain positions which were required to be capitalized. There are no positions which the Company anticipates could change within the next twelve months.

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



	Unrecognized tax benefits
Balance at September 30, 2011	$	32,136
Increases based on positions related to prior years	9,004
Increases based on positions related to current year	11,265
Decreases relating to settlements with taxing authorities	—
Decreases relating to lapses of applicable statutes of limitations	(25		)
Balance at September 28, 2012	$	52,380

The current year increase in positions related to prior years of $9.0 million primarily includes $9.7 million of positions acquired from AATI during the fiscal year.

During the year ended September 28, 2012, the Company did not recognize any significant amount of previously unrecognized tax benefits related to the expiration of the statute of limitations. The Company recognized $0.6 million of accrued interest or penalties related to unrecognized tax benefits during fiscal year 2012.

The Company’s major tax jurisdictions as of September 28, 2012 are the United States, California, Iowa, Singapore and Canada. For the United States, the Company has open tax years dating back to fiscal year 2002 due to the carry forward of tax attributes. For California and Iowa, the Company has open tax years dating back to fiscal year 2002 due to the carry forward of tax attributes. For Singapore, the Company has open tax years dating back to fiscal year 2011. For Canada, the Company has open tax years dating back to fiscal year 2004.