
	Income Taxes

The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense for fiscal 2017, fiscal 2016 and fiscal 2015 is as follows:



	2017			2016			2015
U.S. federal statutory tax rate	35.0		%	35.0		%	35.0		%
Income tax provision reconciliation:
Tax at statutory rate:	$	289,970		$	334,922		$	283,540
Net foreign income subject to lower tax rate	(385,189		)	(264,157		)	(198,061		)
State income taxes, net of federal benefit	(8,801		)	(10,821		)	(4,425		)
Valuation allowance	(7,778		)	13,658			4,875
Federal research and development tax credits	(16,475		)	(16,237		)	(8,232		)
Change in uncertain tax positions	(51,088		)	4,797			2,449
Amortization of purchased intangibles	159,466			35,641			38,973
Acquisition and integration costs	109,040			—			—
Other, net	12,081			(2,546		)	(5,883		)
Total income tax provision	$	101,226		$	95,257		$	113,236

Included in income tax expense for fiscal 2017 is $98.2 million related to post acquisition integration and $10.8 million related to non-deductible acquisition costs. For financial reporting purposes, income before income taxes for fiscal 2017, fiscal 2016 and fiscal 2015 includes the following components:



	2017		2016		2015
Pretax income:
Domestic	$	109,565	$	2,642	$	110,710
Foreign	718,920		954,279		699,404
Income before income taxes	$	828,485	$	956,921	$	810,114

The components of the provision for income taxes for fiscal 2017, fiscal 2016 and fiscal 2015 are as follows:



	2017			2016		2015
Current:
Federal tax	$	857,664		$	27,790	$	65,942
State	7,335			1,409		695
Foreign	62,096			57,934		98,813
Total current	$	927,095		$	87,133	$	165,450
Deferred:
Federal	$	(795,478	)	$	325	$	(27,933	)
State	(24,285		)	2,820		541
Foreign	(6,106		)	4,979		(24,822		)
Total deferred	$	(825,869	)	$	8,124	$	(52,214	)

The Company has a basis difference in its investment in foreign subsidiaries of $10.7 billion primarily as a result of unremitted earnings, the Acquisition and post-acquisition integration . The unremitted earnings as of October 28, 2017 was $6.3 billion. The Company intends for this basis difference to be permanently reinvested. Accordingly no U.S. income taxes have been provided. Determination of the amount of unrecognized deferred income tax liability related to the outside basis difference associated with the Acquisition is not practicable, due to the complexities associated with the manner in which the basis difference could reverse including through receipt of dividends, sale or various other events.

The significant components of the Company’s deferred tax assets and liabilities for fiscal 2017 and fiscal 2016 are as follows:



	2017			2016
Deferred tax assets:
Inventory reserves	$	28,137		$	22,527
Deferred income on shipments to distributors	62,923			49,455
Reserves for compensation and benefits	84,096			48,062
Tax credit carryovers	68,317			68,669
Stock-based compensation	99,815			56,345
Depreciation	2,659			3,078
Net operating losses	11,158			8,225
Acquisition-related costs	3,384			13,336
Other	34,737			39,256
Total gross deferred tax assets	395,226			308,953
Valuation allowance	(53,787		)	(67,094		)
Total deferred tax assets	341,439			241,859
Deferred tax liabilities:
Depreciation	(64,868		)	(59,218		)
Undistributed earnings of foreign subsidiaries	(64,067		)	(60,986		)
Acquisition-related intangibles	(1,851,818		)	(193,059		)
Other	(3,047		)	(2,522		)
Total gross deferred tax liabilities	(1,983,800		)	(315,785		)
Net deferred tax liabilities	$	(1,642,361	)	$	(73,926	)

The valuation allowances of $53.8 million and $67.1 million at October 28, 2017 and October 29, 2016, respectively, are valuation allowances primarily for the Company’s state credit carryforwards. The reduction in the valuation allowance is primarily attributable to the Acquisition. The Company believes that it is more-likely-than-not that these credit carryovers will not be realized and as a result has recorded a full valuation allowance as of October 28, 2017. The state credit carryover of $68.3 million will begin to expire in 2018.

The net operating losses relate to the U.S and are not subject to a valuation allowance. These losses will begin to expire in 2025.

The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax expense provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

As of October 28, 2017 and October 29, 2016, the Company had a net liability of $47.6 million and $75.6 million, respectively, for unrealized tax benefits, all of which, if settled in the Company’s favor, would lower the Company’s effective tax rate in the period recorded. As of October 28, 2017 and October 29, 2016, the Company had a liability of approximately $10.8 million and $20.1 million, respectively, for interest and penalties. The Company includes interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of income. The total gross liability as of October 28, 2017 and October 29, 2016 of $49.6 million and $81.7 million, respectively, for uncertain tax positions is classified as non-current, and is included in other non-current liabilities, because the Company believes that the ultimate payment or settlement of these liabilities may not occur within the next twelve months. The consolidated statements of income for fiscal year 2017, fiscal 2016 and fiscal 2015 include $(12.3) million, $4.0 million and $4.1 million, respectively, of interest and penalties related to these uncertain tax positions. Over the next fiscal year, the Company anticipates the liability may be reduced up to $22.6 million for the possible expiration of an income tax statute of limitations.

The following table summarizes the changes in the total amounts of unrealized tax benefits for fiscal 2015 through fiscal 2017:



	Unrealized Tax Benefits
Balance, November 1, 2014	$	65,464
Additions for tax positions related to current year	524
Additions for tax positions related to prior years	9,799
Reductions for tax positions related to prior years	(2,745		)
Reductions due to lapse of applicable statute of limitations	(1,260		)
Balance, October 31, 2015	$	71,782
Additions for tax positions related to current year	2,539
Reductions for tax positions related to prior years	(4,475		)
Reductions due to lapse of applicable statute of limitations	(1,311		)
Balance, October 29, 2016	$	68,535
Additions for tax positions related to current year	1,742
Additions for tax positions related to acquisition	12,332
Reductions for tax positions related to prior years	(43,186		)
Reductions due to lapse of applicable statute of limitations	(1,566		)
Balance, October 28, 2017	$	37,857

The Company had filed a petition with the U.S. Tax Court for one open matter for fiscal years 2006 and 2007 that pertained to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act. The Company recorded a $36.5 million reserve for this potential liability in the fourth quarter of fiscal 2013. A favorable ruling was rendered by the U.S. Tax Court on November 22, 2016. On February 27, 2017, the U.S. Tax Court’s Decision Order was entered and the 90-day period for the Internal Revenue Service to file a Notice of Appeal lapsed on May 30, 2017. As a result, on May 30, 2017, the Company released the $50.5 million reserve, which was comprised of the $41.7 million in originally-recorded and subsequent accruals for this potential liability, plus $8.8 million of net interest.

All of the Company's U.S. federal tax returns prior to fiscal 2014 are no longer subject to examination.

All of the Company's Ireland tax returns prior to fiscal 2013 are no longer subject to examination.

The tax returns for Linear Technology Pte. Ltd. (Singapore) prior to the fiscal year ended June 2012 are no longer subject to examination.

The tax returns for Linear Semiconductor Sdn. Bhd. (Malaysia) prior to the fiscal year ended June 2011 are no longer subject to examination.

The Company has a partial tax holiday in Singapore and Malaysia whereby the local statutory rate is significantly reduced, if certain conditions are met. The tax holiday for Singapore is effective through August 2019 and the tax holiday for Malaysia is effective through July 2025. The impact of the Singapore and Malaysia tax holidays was to increase net income by approximately $27.4 million in fiscal year 2017.