Income Taxes

12 Months Ended

Jun. 28, 2020

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



	Year Ended
	June 28, 2020		June 30, 2019			June 24, 2018
	(in thousands)
United States	$	44,739	$	(59,876	)	$	128,190
Foreign	2,530,239		2,506,447			3,023,599
	$	2,574,978	$	2,446,571		$	3,151,789

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



	Year Ended
	June 28, 2020			June 30, 2019			June 24, 2018
	(in thousands)
Federal:
Current	$	216,513		$	143,845		$	630,148
Deferred	(18,458		)	(10,722		)	12,871
	198,055			133,123			643,019
State:
Current	4,724			5,994			5,348
Deferred	6,524			4,944			(3,273		)
	11,248			10,938			2,075
Foreign:
Current	119,766			110,283			132,566
Deferred	(5,844		)	797			(6,552		)
	113,922			111,080			126,014
Total provision for income taxes	$	323,225		$	255,141		$	771,108

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 28, 2020			June 30, 2019
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	249,874		$	231,390
Allowances and reserves	119,974			97,671
Equity-based compensation	7,167			14,661
Inventory valuation differences	26,069			18,516
Prepaid cost sharing	—			74,139
Outside basis differences of foreign subsidiaries	105,159			16,260
Operating lease liabilities	40,157			—
Other	26,361			17,972
Gross deferred tax assets	574,761			470,609
Valuation allowance	(244,973		)	(226,928		)
Net deferred tax assets	329,788			243,681
Deferred tax liabilities:
Intangible assets	(6,442		)	(9,883		)
Convertible debt	(24,530		)	(46,993		)
Capital assets	(105,508		)	(83,298		)
Amortization of goodwill	(12,256		)	(11,299		)
Right-of-use assets	(40,157		)	—
Other	(7,509		)	(8,752		)
Gross deferred tax liabilities	(196,402		)	(160,225		)
Net deferred tax assets	$	133,386		$	83,456

The change in the gross deferred tax assets, gross deferred tax liabilities, and valuation allowance between fiscal year 2020 and 2019 is primarily due to increases in outside basis differences of foreign subsidiaries, tax credits, operating lease liabilities and right-of-use assets, and decreases in prepaid cost sharing.

The Company previously made an accounting policy election to record deferred taxes related to Global Intangible Low-Taxed Income (“GILTI”).

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 $245.0 million related to California deferred tax assets. At June 28, 2020, the Company continued to record a valuation allowance to offset the entire California deferred tax asset balance due to the single sales factor apportionment resulting in lower taxable income in California.

At June 28, 2020, the Company had federal net operating loss carryforwards of $29.1 million. If not utilized, these losses will begin to expire in fiscal year 2021, and are subject to limitation on their utilization.

At June 28, 2020, the Company had state net operating loss carryforwards of $91.4 million. If not utilized, these losses will begin to expire in fiscal year 2021 and are subject to limitation on their utilization.

At June 28, 2020, the Company had state tax credit carryforwards of $360.0 million. Substantially all of these credits can be carried forward indefinitely.

A reconciliation of income tax expense provided at the federal statutory rate (21% in fiscal year 2020 and fiscal year 2019, and 28.27% in fiscal year 2018) to actual income tax expense is as follows:



	Year Ended
	June 28, 2020			June 30, 2019			June 24, 2018
	(in thousands)
Income tax expense computed at federal statutory rate	$	540,745		$	513,780		$	891,011
State income taxes, net of federal tax benefit	(28,046		)	(17,565		)	(50,585		)
Foreign income taxed at different rates	(146,023		)	(260,344		)	(939,808		)
Settlements and reductions in uncertain tax positions	(12,854		)	(31,291		)	(33,367		)
Tax credits	(88,762		)	(71,779		)	(69,301		)
State valuation allowance, net of federal tax benefit	30,923			26,742			57,302
Equity-based compensation	(23,248		)	(7,566		)	(35,875		)
Other permanent differences and miscellaneous items	50,490			39,251			43,214
U.S. tax reform impacts	—			63,913			908,517
	$	323,225		$	255,141		$	771,108

In November 2019, the Ninth Circuit rejected the en banc appeal petitioned by Altera in July 2019. In that quarter, the Company evaluated the impact of the decision and viewed the denial as an indication that Altera’s position of excluding stock-based compensation expense in an inter-company cost-sharing arrangement was unlikely to be sustained upon further litigation. As a result, the Company reversed $74.5 million of net tax assets associated with stock-based compensation benefits related to previous years in the Condensed Consolidated Financial Statements in the three months ended December 29, 2019 and the Company no longer reflected a net tax benefit within its financial statements related to excluding stock-based compensation from its inter-company cost-sharing arrangement. In February 2020, Altera petitioned the SCOTUS to hear their case. In June 2020, the SCOTUS denied the petition.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $539.3 million at June 28, 2020. If these earnings were remitted to the United States, they would be subject to foreign withholding taxes of approximately $86.4 million at current statutory rates.

As of June 28, 2020, the total gross uncertain tax positions were $476.7 million, compared to $420.8 million as of June 30, 2019, and $305.4 million as of June 24, 2018. During fiscal year 2020, gross uncertain tax positions increased by $55.9 million. The amount of uncertain tax positions that, if recognized, would impact the effective tax rate was $423.8 million, $376.0 million, and $268.3 million, as of June 28, 2020, June 30, 2019, and June 24, 2018, respectively. The aggregate changes in the balance of gross uncertain tax positions were as follows:




	(in thousands)
Balance as of June 25, 2017	$	339,447
Settlements and effective settlements with tax authorities	(693		)
Lapse of statute of limitations	(88,837		)
Increases in balances related to tax positions taken during prior periods	2,044
Decreases in balances related to tax positions taken during prior periods	(1,320		)
Increases in balances related to tax positions taken during current period	54,772
Balance as of June 24, 2018	305,413
Settlements and effective settlements with tax authorities	(3,705		)
Lapse of statute of limitations	(28,176		)
Increases in balances related to tax positions taken during prior periods	78,927
Decreases in balances related to tax positions taken during prior periods	(1,577		)
Increases in balances related to tax positions taken during current period	69,890
Balance as of June 30, 2019	420,772
Settlements and effective settlements with tax authorities	(1,836		)
Lapse of statute of limitations	(8,026		)
Increases in balances related to tax positions taken during prior periods	3,206
Decreases in balances related to tax positions taken during prior periods	(3,989		)
Increases in balances related to tax positions taken during current period	66,568
Balance as of June 28, 2020	$	476,695

The Company recognizes interest expense and penalties related to the above uncertain tax positions within income tax expense. The Company had accrued $40.2 million, $19.1 million, and $13.0 million cumulatively for gross interest and penalties as of June 28, 2020, June 30, 2019, and June 24, 2018, 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 28, 2020, tax years 2004-2020 remain subject to examination in the jurisdictions where the Company operates. The Internal Revenue Service (“IRS”) is examining the Company’s U.S. federal income tax return for the fiscal year ended June 24, 2018. As of June 28, 2020, no significant adjustments have been proposed by the IRS. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the IRS will occur.

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 uncertain tax positions as a result of tax examinations or lapses of statute of limitations. The change in uncertain tax positions as a result of lapses of statute of limitations may range up to $17.5 million.