Income Taxes

The components of income (loss) before income taxes were as follows:



	June 26, 2016			June 28, 2015		June 29, 2014
	(in thousands)
United States	$	(113,607	)	$	72,728	$	78,076
Foreign	1,073,724			668,122		645,287
	$	960,117		$	740,850	$	723,363

Significant components of the provision (benefit) for income taxes attributable to income before income taxes were as follows:



	June 26, 2016			June 28, 2015			June 29, 2014
	(in thousands)
Federal:
Current	$	1,426		$	16,795		$	31,762
Deferred	(38,616		)	12,115			10,692
	(37,190		)	28,910			42,454
State:
Current	2,892			1,376			3,192
Deferred	(7,600		)	158			(869		)
	(4,708		)	1,534			2,323
Foreign:
Current	90,752			61,551			49,273
Deferred	(2,786		)	(6,722		)	(2,976		)
	87,966			54,829			46,297
Total Provision (Benefit) for Income Taxes	$	46,068		$	85,273		$	91,074

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Significant components of the Company’s net deferred tax assets and liabilities were as follows:



	June 26, 2016			June 28, 2015
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	176,767		$	129,234
Allowances and reserves	128,416			131,079
Equity-based compensation	29,414			21,086
Inventory valuation differences	17,178			15,167
Prepaid cost sharing	88,522			—
Other	24,540			13,942
Gross deferred tax assets	464,837			310,508
Valuation allowance	(101,689		)	(85,620		)
Net deferred tax assets	363,148			224,888
Deferred tax liabilities:
Intangible assets	(46,774		)	(64,725		)
Convertible debt	(151,483		)	(130,991		)
Temporary differences for capital assets	(61,845		)	(37,635		)
Amortization of goodwill	(14,176		)	(12,502		)
Unremitted earnings of foreign subsidiaries	(146,459		)	(66,412		)
Other	(8,594		)	(6,100		)
Gross deferred tax liabilities	(429,331		)	(318,365		)
Net deferred tax liabilities	$	(66,183	)	$	(93,477	)

The change in the gross deferred tax assets, gross deferred tax liabilities and valuation allowance between fiscal year 2016 and 2015 is primarily due to an increase related to tax credit carryforwards, recognition of a prepaid cost sharing deferred tax benefit related to the Altera case ruling and a decrease in deferred tax liabilities related to amortization of intangible assets offset by an increase in deferred tax liabilities related to depreciation of tangible assets, convertible debt accretion and an accrual for future tax liabilities due to the expected repatriation of foreign earnings of certain foreign subsidiaries for 2016.

Realization of the Company’s net deferred tax assets is based upon the weighting of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more-likely-than-not that such deferred tax assets will be realized with the exception of $101.7 million primarily related to California and certain foreign deferred tax assets.

The provisions related to the tax accounting for equity-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, the Company will only recognize an excess benefit from equity-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, the Company continued to elect to account for the indirect benefits of equity-based compensation such as the research and development tax credit through the Consolidated Statement of Operations.

At June 26, 2016, the Company had federal net operating loss carryforwards of approximately $181.2 million. The majority of these losses will begin to expire in fiscal year 2019, and are subject to limitations on their utilization. The tax benefits relating to approximately $59.6 million of federal net operating loss carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2016, the Company had state net operating loss carryforwards of approximately $164.5 million. If not utilized, the net operating loss carryforwards will begin to expire in fiscal year 2020, and are subject to limitations on their utilization. The tax benefits relating to approximately $46.4 million of state net operating loss carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2016, the Company had federal tax credit carryforwards of approximately $193.6 million, of which $28.0 million of foreign tax credit will begin to expire in fiscal year 2017 and $163.7 million of research and development tax credit will begin to expire in fiscal year 2030. The remaining balance of $1.8 million of AMT credit may be carried forward indefinitely. The tax benefits relating to approximately $19.7 million of federal tax credit carryforwards will be credited to additional paid-in-capital when recognized.

At June 26, 2016, the Company had state tax credit carryforwards of approximately $264.0 million. Substantially all state tax credit carryforwards may be carried forward indefinitely.

At June 26, 2016, the Company had foreign net operating loss carryforwards of approximately $30.6 million, of which approximately $15.6 million may be carried forward indefinitely and $15.0 million will begin to expire in fiscal year 2017.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2016, 2015, and 2014) to actual income tax expense (benefit) is as follows:



	June 26, 2016			June 28, 2015			June 29, 2014
	(in thousands)
Income tax expense computed at federal statutory rate	$	336,041		$	259,297		$	253,177
State income taxes, net of federal tax benefit	(14,070		)	(8,611		)	1,884
Foreign income taxed at different rates	(265,123		)	(175,581		)	(164,130		)
Tax credits	(48,277		)	(24,416		)	(15,650		)
State valuation allowance, net of federal tax benefit	17,948			8,594			(1,707		)
Equity-based compensation	12,366			28,845			23,167
Other permanent differences and miscellaneous items	7,183			(2,855		)	(5,667		)
	$	46,068		$	85,273		$	91,074

In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock-based compensation from its inter-company cost-sharing arrangement. However, the U.S. Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. The Company has evaluated the opinion and has recorded a tax benefit of $87.7 million related to reimbursement of cost share payments for the previously shared stock-based compensation costs. The Company has also recorded a tax benefit of $11.2 million related to stock-based compensation expense. In addition, the Company has recorded a tax liability of $73.6 million for the U.S. tax cost of potential repatriation of the associated contingent foreign earnings because at this time the Company cannot reasonably conclude that it has the ability and the intent to indefinitely reinvest these contingent earnings. The Company will continue to monitor this matter and related potential impacts to the consolidated financial statements.

Effective from fiscal year 2014 through June 2023, the Company has a 10 year tax ruling in Switzerland for one of its foreign subsidiaries. In the prior years, the Company had a tax holiday in Switzerland which was effective from fiscal year 2003 through June 2013. The impact of the tax ruling decreased taxes by approximately $4.3 million, $4.8 million and $7.4 million for fiscal years 2016, 2015 and 2014, respectively. The benefit of the tax ruling on diluted earnings per share was approximately $0.02 in fiscal year 2016, $0.03 in fiscal year 2015 and $0.04 in fiscal year 2014.

Unremitted earnings of the Company’s foreign subsidiaries included in consolidated retained earnings aggregated to approximately $4.3 billion at June 26, 2016. These earnings are indefinitely reinvested in foreign operations. If these earnings were remitted to the United States, they would be subject to U.S. and foreign withholding taxes of approximately $1.2 billion at current statutory rates. The Company’s federal income tax provision includes U.S. income taxes on certain foreign-based income.

As of June 26, 2016, the total gross unrecognized tax benefits were $417.4 million compared to $363.6 million as of June 28, 2015 and $352.1 million as of June 29, 2014. During fiscal year 2016, gross unrecognized tax benefits increased by approximately $53.8 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $323.4 million, $276.8 million and $269.4 million, as of June 26, 2016, June 28, 2015 and June 29, 2014 respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:




	(in thousands)
Balance as of June 30, 2013	$	333,114
Lapse of statute of limitations	(16,048		)
Increases in balances related to tax positions taken during prior periods	6,225
Decreases in balances related to tax positions taken during prior periods	(4,182		)
Increases in balances related to tax positions taken during current period	33,003
Balance as of June 29, 2014	352,112
Settlements and effective settlements with tax authorities	(2,108		)
Lapse of statute of limitations	(9,376		)
Increases in balances related to tax positions taken during prior periods	3,729
Decreases in balances related to tax positions taken during prior periods	(12,615		)
Increases in balances related to tax positions taken during current period	31,810
Balance as of June 28, 2015	363,552
Lapse of statute of limitations	(10,992		)
Increases in balances related to tax positions taken during prior periods	18,200
Decreases in balances related to tax positions taken during prior periods	(421		)
Increases in balances related to tax positions taken during current period	47,093
Balance as of June 26, 2016	$	417,432

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $42.4 million, $35.5 million and $29.5 million cumulatively, for gross interest and penalties as of June 26, 2016, June 28, 2015 and June 29, 2014, respectively.

The Company is subject to audits by state and foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 26, 2016, tax years 2004-2015 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of the examinations in connection with all of its tax audits worldwide and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.