Income Taxes

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



	Year Ended
	June 25, 2017		June 26, 2016			June 28, 2015
	(in thousands)
United States	$	7,553	$	(113,607	)	$	72,728
Foreign	1,804,120		1,073,724			668,122
	$	1,811,673	$	960,117		$	740,850

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



	Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
	(in thousands)
Federal:
Current	$	(70,858	)	$	1,426		$	16,795
Deferred	99,700			(38,616		)	12,115
	28,842			(37,190		)	28,910
State:
Current	(963		)	2,892			1,376
Deferred	(2,246		)	(7,600		)	158
	(3,209		)	(4,708		)	1,534
Foreign:
Current	85,479			90,752			61,551
Deferred	2,798			(2,786		)	(6,722		)
	88,277			87,966			54,829
Total provision for income taxes	$	113,910		$	46,068		$	85,273

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 25, 2017			June 26, 2016
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	175,595		$	176,767
Allowances and reserves	170,752			128,416
Equity-based compensation	25,828			29,414
Inventory valuation differences	19,602			17,178
Prepaid cost sharing	133,831			88,522
Other	20,175			24,540
Gross deferred tax assets	545,783			464,837
Valuation allowance	(114,011		)	(101,689		)
Net deferred tax assets	431,772			363,148
Deferred tax liabilities:
Intangible assets	(30,944		)	(46,774		)
Convertible debt	(153,047		)	(151,483		)
Capital assets	(72,727		)	(61,845		)
Amortization of goodwill	(15,582		)	(14,176		)
Unremitted earnings of foreign subsidiaries	(302,663		)	(146,459		)
Other	(9,844		)	(8,594		)
Gross deferred tax liabilities	(584,807		)	(429,331		)
Net deferred tax liabilities	$	(153,035	)	$	(66,183	)

The change in the gross deferred tax assets, gross deferred tax liabilities, and valuation allowance between fiscal years 2017 and 2016 is primarily due to an increase related to allowances and reserves and an increase in deferred tax liabilities related to an accrual for future tax liabilities due to the expected repatriation of earnings of certain foreign subsidiaries.

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 $114.0 million primarily related to California, certain state, 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 25, 2017, the Company had federal net operating loss carryforwards of approximately $109.0 million. The majority of these losses will begin to expire in fiscal year 2019, and are subject to limitations on their utilization.

At June 25, 2017, the Company had state net operating loss carryforwards of approximately $85.4 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.

At June 25, 2017, the Company had federal tax credit carryforwards of approximately $236.2 million, of which $33.2 million of foreign tax credit will begin to expire in fiscal year 2018 and $201.2 million of research and development tax credit will begin to expire in fiscal year 2030. The remaining balance of $1.8 million of alternative minimum tax credit may be carried forward indefinitely.

At June 25, 2017, the Company had state tax credit carryforwards of approximately $296.0 million. Substantially all state tax credit carryforwards can be carried forward indefinitely.

At June 25, 2017, the Company had foreign net operating loss carryforwards of approximately $9.4 million, which will begin to expire in fiscal year 2018.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2017, 2016, and 2015) to actual income tax expense is as follows:



	Year Ended
	June 25, 2017			June 26, 2016			June 28, 2015
	(in thousands)
Income tax expense computed at federal statutory rate	$	634,086		$	336,041		$	259,297
State income taxes, net of federal tax benefit	(11,973		)	(14,070		)	(8,611		)
Foreign income taxed at different rates	(352,860		)	(265,123		)	(175,581		)
Settlements and reductions in uncertain tax positions	(144,519		)	—			—
Tax credits	(37,713		)	(48,277		)	(24,416		)
State valuation allowance, net of federal tax benefit	12,070			17,948			8,594
Equity-based compensation	13,187			12,366			28,845
Other permanent differences and miscellaneous items	1,632			7,183			(2,855		)
	$	113,910		$	46,068		$	85,273

Effective from fiscal year 2014 through June 2023, the Company has a 10-year tax ruling in Switzerland for one of its foreign subsidiaries. The impact of the tax ruling decreased taxes by approximately $6.3 million, $4.3 million, and $4.8 million for fiscal years 2017, 2016, and 2015, respectively. The benefit of the tax ruling on diluted earnings per share was approximately $0.03 in fiscal year 2017, $0.02 in fiscal year 2016, and $0.03 in fiscal year 2015.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $5.4 billion at June 25, 2017. If these earnings were remitted to the United States, they would be subject to U.S. and foreign withholding taxes of approximately $1.6 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 25, 2017, the total gross unrecognized tax benefits were $339.4 million compared to $417.4 million as of June 26, 2016, and $363.6 million as of June 28, 2015. During fiscal year 2017, gross unrecognized tax benefits decreased by approximately $78.0 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $247.6 million, $323.4 million, and $276.8 million, as of June 25, 2017, June 26, 2016, and June 28, 2015, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:




	(in thousands)
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
Settlements and effective settlements with tax authorities	(6,691		)
Lapse of statute of limitations	(113,491		)
Increases in balances related to tax positions taken during prior periods	6,557
Decreases in balances related to tax positions taken during prior periods	(11,528		)
Increases in balances related to tax positions taken during current period	47,168
Balance as of June 25, 2017	$	339,447

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $15.7 million, $42.4 million, and $35.5 million cumulatively for gross interest and penalties as of June 25, 2017, June 26, 2016, and June 28, 2015, 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 25, 2017, tax years 2004-2016 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of 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 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitations. The change in unrecognized tax benefits is not expected to be material.