INCOME TAXES

Pretax income (loss) is as follows:



	For the Year Ended
	June 30, 2018		June 24, 2017		June 25, 2016
	(in thousands)
Domestic pre-tax income (loss)	$	149,056	$	154,628	$	(48,985	)
Foreign pre-tax income (loss)	675,829		524,961		334,039
Total	$	824,885	$	679,589	$	285,054

The provision for income taxes consisted of the following:



	For the Year Ended
	June 30, 2018		June 24, 2017			June 25, 2016
	(in thousands)
Federal
Current	$	318,288	$	107,303		$	98,810
Deferred	25,769		(8,171		)	(52,240		)
State
Current	117		(361		)	1,808
Deferred	1,325		(436		)	(2,406		)
Foreign
Current	11,450		8,930			10,278
Deferred	618		711			1,329
Total provision for income taxes	$	357,567	$	107,976		$	57,579

A reconciliation of the Company's Federal statutory tax rate to the Company's effective tax rate is as follows:



	For the Year Ended
	June 30, 2018		June 24, 2017		June 25, 2016

Federal statutory rate	28.1	%	35.0	%	35.0	%
State tax, net of federal benefit	0.2		(0.2	)	(0.6	)
General business credits	(0.8	)	(1.3	)	(2.8	)
Effect of foreign operations	(16.7	)	(20.2	)	(21.7	)
Stock-based compensation	0.4		0.1		4.7
Interest accrual for unrecognized tax benefits	2.1		2.1		3.2
Non-deductible goodwill	—		—		2.5
Provisional Transition Tax	28.7		—		—
Deferred tax remeasurement	1.6		—		—
Other	(0.3	)	0.4		(0.1	)
Effective tax rate	43.3	%	15.9	%	20.2	%

On December 22, 2017 legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Act”), was enacted. The primary impact of the Act in fiscal year 2018 are taxation of accumulated unremitted earnings of our foreign subsidiaries ("Transition Tax") and a reduction of our federal statutory tax rate from 35.0% to 28.1% (average of a 35.0% rate for the first half of fiscal year 2018 and a 21.0% rate for the second half of fiscal year 2018). Securities and Exchange Commission Staff Accounting Bulletin No. 118 allowed the use of provisional amounts (reasonable estimates) if accounting for the income tax effects of the Act have not been completed. Provisional amounts must be adjusted within one year from the enactment date of the Act. To determine the amount of the Transition Tax, we must calculate the accumulated unremitted earnings of the Company's foreign subsidiaries and the amount of foreign income tax paid on such earnings. The Company made a reasonable estimate of the Transition Tax and in the second quarter of fiscal year 2018 recorded a provisional Transition Tax charge of $236.9 million, which consists of a $248.0 million Transition Tax liability less $11.1 million of deferred tax liabilities established in prior years for U.S. tax on unremitted foreign earnings. No adjustment to the provisional Transition Tax charge has been made as of the end of fiscal year 2018 as the Company continues to analyze available guidance to more precisely compute the Transition Tax. In the second quarter of fiscal year 2018 the Company recorded a $13.7 million charge to remeasure deferred taxes as of the enactment date of the Act to reflect the federal statutory rate reduction.

The Act contains Global Intangible Low-Taxed Income (“GILTI”) rules, which first impact the Company in fiscal year 2019. Under the GILTI rules certain income earned by the Company's foreign subsidiaries is subject to current U.S. taxation. The Company is continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat future U.S. tax generated by the GILTI rules as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not recorded any amounts related to potential GILTI tax in its financial statements and will make an accounting policy election after it completes its evaluation of the GILTI rules and the application of ASC 740.

As of June 30, 2018, the Company's foreign subsidiaries have accumulated undistributed earnings of approximately $513.7 million that are intended to be indefinitely reinvested outside the U.S. No deferred tax liability has been recognized for the repatriation of these earnings. The Act eliminated any additional federal tax upon repatriation of accumulated foreign earnings; however, those earnings may still be subject to foreign withholding taxes if they are repatriated. At June 30, 2018 the unrecognized deferred tax liability on indefinitely reinvested earnings was $25.5 million, which is primarily foreign withholding tax.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company's deferred tax assets and liabilities are as follows:



	For the Year Ended
	June 30, 2018			June 24, 2017
	(in thousands)
Deferred tax assets:
Distributor related accruals and sales return and allowance accruals	$	3,855		$	10,746
Accrued compensation	8,361			36,630
Stock-based compensation	10,071			14,919
Net operating loss carryovers	40,989			45,743
Tax credit carryovers	90,968			71,231
Other reserves and accruals not currently deductible for tax purposes	29,903			50,126
Other	4,707			5,179
Total deferred tax assets	188,854			234,574

Deferred tax liabilities:
Fixed assets and intangible assets cost recovery, net	(52,704		)	(66,355		)
Unremitted earnings of foreign subsidiaries	(1,532		)	(13,703		)
Other	(2,553		)	(3,296		)
Total deferred tax liabilities	(56,789		)	(83,354		)

Net deferred tax assets /(liabilities) before valuation allowance	132,065			151,220
Valuation allowance	(128,128		)	(110,411		)
Net deferred tax assets/(liabilities)	$	3,937		$	40,809

The valuation allowance as of June 30, 2018 and June 24, 2017 primarily relates to certain state and foreign net operating loss carryforwards and certain state tax credit carryforwards. The valuation allowance increased by $17.7 million in fiscal year 2018.

As of June 30, 2018, the Company has $18.7 million of federal net operating loss carryforwards expiring at various dates between fiscal years 2021 and 2033, $37.9 million of state net operating loss carryforwards expiring at various dates through fiscal year 2033, $133.9 million of foreign net operating loss carryforwards with no expiration date, $9.0 million of state tax credit carryforwards expiring at various dates through fiscal year 2033, and $106.1 million of state tax credit carryforwards with no expiration date.

The Company classifies unrecognized tax benefits as (i) a current liability to the extent that payment is anticipated within one year; (ii) a non-current liability to the extent that payment is not anticipated within one year; or (iii) as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets such as operating loss or tax credit carryforwards or to the extent that operating loss or tax credit carryforwards would be able to offset the additional tax liability generated by unrecognized tax benefits.

A reconciliation of the change in gross unrecognized tax benefits, excluding interest, penalties and the federal benefit for state unrecognized tax benefits, is as follows:



	For the Year Ended
	June 30, 2018			June 24, 2017			June 25, 2016
	(in thousands)
Balance as of beginning of year	$	539,569		$	482,745		$	427,629
Tax positions related to current year:
Addition	48,646			57,791			53,899
Tax positions related to prior year:
Addition	3,806			1,059			3,035
Reduction	—			(1,410		)	(205		)
Settlements	—			—			(943		)
Lapses in statutes of limitations	(563		)	(616		)	(670		)
Balance as of end of year	$	591,458		$	539,569		$	482,745

The total amount of gross unrecognized tax benefits as of June 30, 2018 that, if recognized, would affect the effective tax rate is $541.4 million. $50.1 million of unrecognized tax benefits would be offset by an increase in the valuation allowance for deferred tax assets and thus would not affect the effective tax rate.

The Company reports interest and penalties related to unrecognized tax benefits as a component of income tax expense. The gross amount of interest and penalties recognized in income tax expense during the fiscal years ended June 30, 2018, June 24, 2017, and June 25, 2016 was $27.8 million, $22.4 million and $14.7 million, respectively, and the total amount of interest and penalties accrued as of June 30, 2018, June 24, 2017, and June 25, 2016 was $61.9 million, $71.4 million, and $49.0 million, respectively.

The Company engages in continuous discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. It is reasonably possible that the balance of gross unrecognized tax benefits recognized by the Company, including accrued interest and penalties, could decrease by up to $403.0 million within the next twelve months due to the completion of federal tax audits, including any administrative appeals. The $403.0 million primarily relates to matters involving federal taxation of cross-border transactions.

The Company’s federal corporate income tax returns are audited on a recurring basis by the Internal Revenue Service (“IRS”). The IRS concluded its field examination of the Company’s federal corporate income tax returns for fiscal years 2009 through 2011 and issued an IRS Revenue Agent's Report in July 2016 that included proposed adjustments for transfer pricing issues related to cost sharing and buy-in license payments for the use of intangible property by one of the Company’s international subsidiaries. The Company disagreed with the proposed transfer pricing adjustments and related penalties, and in September 2016, the Company filed a protest to challenge the proposed adjustments and request a conference with the Appeals Office of the IRS. In May 2018, a preliminary understanding was reached with the IRS regarding the contested issues for the audit and post-audit years, which the Company expects may be finalized in fiscal year 2019 with the execution of a closing agreement. In June 2018 the Company made advance payments for audit and post-audit year tax of $140.7 million and interest of $37.4 million. These payments will reduce the accrual of interest on audit and post-audit year tax deficiencies that would be owed if the preliminary understanding is finalized. The Company’s reserves for unrecognized tax benefits are sufficient to cover the audit and post-audit year tax deficiencies that would be owed as a result of the preliminary understanding. In fiscal year 2017, the IRS commenced an audit of the Company’s federal corporate income tax returns for fiscal years 2012 through 2014, which is ongoing. The Company expects that in fiscal year 2019 the IRS will commence an audit of the Company's federal corporate income tax returns for fiscal years 2015 through 2017.

A summary of the fiscal tax years that remain subject to examination, as of June 30, 2018, for the Company's major tax jurisdictions are as follows:



United States - Federal	2009	-	Forward
United States - Various States	2009	-	Forward
Ireland	2014	-	Forward
Philippines	2015	-	Forward
Singapore	2014	-	Forward
United Kingdom	2012	-	Forward