Income taxes

The components of the provision for income taxes are indicated in the table below. The tax provision for deferred income taxes results from temporary differences arising principally from inventory valuation, accounts receivable valuation, net operating losses, certain accruals and depreciation, net of any changes to the valuation allowance.



	Years Ended
	June 30, 2012		July 2, 2011			July 3, 2010
	(Thousands)
Current:
Federal	$	94,237	$	64,476		$	61,892
State and local	19,466		11,724			9,789
Foreign	98,278		109,731			56,608
Total current taxes	211,981		185,931			128,289
Deferred:
Federal	6,896		41,029			24,251
State and local	758		5,273			1,290
Foreign	4,128		(30,336		)	20,883
Total deferred taxes	11,782		15,966			46,424
Provision for income taxes	$	223,763	$	201,897		$	174,713

The provision for income taxes noted above is computed based upon the split of income before income taxes from U.S. and foreign operations. U.S. income before income taxes was $320,333,000, $273,287,000 and $241,029,000 and foreign income before income taxes was $470,449,000, $597,679,000 and $344,054,000 in fiscal 2012, 2011 and 2010, respectively.

Reconciliations of the federal statutory tax rate to the effective tax rates are as follows:



	Years Ended
	June 30, 2012		July 2, 2011		July 3, 2010
Federal statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	1.8		1.5		1.2
Foreign tax rates, net of valuation allowances	(5.4	)	(5.3	)	(6.6	)
Release of valuation allowance, net of U.S. tax expense (as discussed below)	(2.8	)	(7.4	)	—
Change in contingency reserves	0.5		1.4		2.6
Tax audit settlements	(1.0	)	(0.4	)	(1.6	)
Other, net	0.2		(1.6	)	(0.7	)
Effective tax rate	28.3	%	23.2	%	29.9	%

Foreign tax rates generally consist of the impact of the difference between foreign and federal statutory rates applied to foreign income (losses) and also include the impact of valuation allowances against the Company's otherwise realizable foreign loss carry-forwards.

Avnet’s effective tax rate on income before income taxes was 28.3% in fiscal 2012 as compared with an effective tax rate of 23.2% in fiscal 2011. Included in the fiscal 2012 effective tax rate is a net tax benefit of $8,616,000, which is comprised of (i) a tax benefit of $30,785,000 for the release of tax reserves (valuation allowance) against deferred tax assets that were determined to be realizable, primarily related to a legal entity in EMEA (discussed further below), partially offset by (ii) a tax provision of $22,170,000 related to changes in existing tax positions, withholding tax related to legal entity reorganizations, the establishment of tax reserves against certain deferred tax assets and U.S. tax expense associated with the release of the valuation allowance, partially offset by net favorable audit settlements. The fiscal 2012 effective tax rate is higher than the fiscal 2011 effective tax rate primarily due to a lower amount of tax reserve released in fiscal 2012 as compared with the amount released in fiscal 2011, as discussed further below, and, to a lesser extent, a more favorable impact from audit settlements and changes to existing tax positions in fiscal 2012 as compared with fiscal 2011. These favorable impacts were partially offset by the withholding tax mentioned above.

During fiscal 2012, the Company had a partial valuation allowance against significant tax assets related to a legal entity in EMEA due to, among several other factors, a history of losses in that entity. Since fiscal 2010, the entity has been experiencing improved earnings which required the partial release of the valuation allowance to the extent the entity has projected taxable income. In each of fiscal 2012 and 2011, the Company determined a portion of the valuation allowance for this legal entity was no longer required due to the expected continuation of improved earnings in the foreseeable future and, as a result, the Company's effective tax rate was positively impacted (decreased) upon the release of the valuation allowance, net of the U.S. tax expense. In fiscal 2012 and 2011, the tax reserves released associated with this EMEA legal entity were $22,127,000 and $64,215,000, respectively, net of the U.S. tax expense associated with the release. The Company will continue to evaluate the need for a valuation allowance against these tax assets and will adjust the valuation allowance as deemed appropriate which, when adjusted, will result in an impact to the effective tax rate. Factors that are considered in such an evaluation include historic levels of income, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. Excluding the benefit in both fiscal years related to the release of the tax valuation allowance associated with the EMEA legal entity, the effective tax rate for fiscal 2012 would have been 31.1% as compared with 30.6% for fiscal 2011.

Avnet’s effective tax rate on income before income taxes was 23.2% in fiscal 2011 as compared with an effective tax rate of 29.9% in fiscal 2010. As compared with fiscal 2010, the fiscal 2011 effective tax rate was primarily impacted by a net tax benefit related to the release of a tax valuation allowance on certain deferred tax assets which were determined to be realizable (as discussed above) and, to a lesser extent, net favorable tax audit settlements, partially offset by changes to existing tax positions.

The Company is in the final stages of two audits by the U.S. Internal Revenue Service, one of which relates to the Company and one of which relates to the pre-acquisition period of an acquired entity. As a result, it is reasonably possible that within the next twelve months, the Company may record a tax benefit of $30.0 million to $35.0 million, which would favorably impact the effective tax rate in the period in which the matter is effectively settled. This estimated benefit is comprised primarily of the recognition of additional net operating losses as well as the release of related reserves, partially offset by unfavorable audit adjustments.

The significant components of deferred tax assets and liabilities, included primarily in “other assets” on the consolidated balance sheets, are as follows:



	June 30, 2012			July 2, 2011
	(Thousands)
Deferred tax assets:
Inventory valuation	$	13,298		$	13,680
Accounts receivable valuation	29,984			27,916
Federal, state and foreign tax loss carry-forwards	304,410			394,093
Various accrued liabilities and other	88,792			57,686
	436,484			493,375
Less — valuation allowance	(244,093		)	(310,772		)
	192,391			182,603
Deferred tax liabilities:
Depreciation and amortization of property, plant and equipment	(54,745		)	(43,302		)
Net deferred tax assets	$	137,646		$	139,301

The change in the valuation allowance from fiscal 2011 to fiscal 2012 was a combination of (i) a reduction of $30,785,000 primarily due to the previously mentioned release of valuation allowance in EMEA, $26,231,000 of which impacted the effective tax rate while the remainder was offset in deferred income taxes, and (ii) a decrease of $35,894,000 primarily related to the translation impact of foreign currency exchange rates.

As of June 30, 2012, the Company had foreign net operating loss carry-forwards of approximately $1,094,296,000, of which $44,225,000 will expire during fiscal 2013 and 2014, substantially all of which have full valuation allowances, $254,742,000 have expiration dates ranging from fiscal 2015 to 2032 and the remaining $795,330,000 have no expiration date. The carrying value of the Company’s net operating loss carry-forwards is dependent upon the Company’s ability to generate sufficient future taxable income in certain tax jurisdictions. In addition, the Company considers historic levels of income, expectations and risk associated with estimates of future taxable income and on-going prudent and feasible tax planning strategies in assessing a tax valuation allowance.

Accruals for income tax contingencies (or accruals for unrecognized tax benefits) are included in “accrued expenses and other” and “other long term liabilities” on the consolidated balance sheet. These contingency reserves relate to various tax matters that result from uncertainties in the application of complex income tax regulations in the numerous jurisdictions in which the Company operates. The change to contingency reserves during fiscal 2012 is primarily due to favorable non-cash audit settlements which are included in the “reductions for tax positions taken in prior periods” caption in the following table. As of June 30, 2012, unrecognized tax benefits were $146,626,000, of which approximately $126,933,000, if recognized, would favorably impact the effective tax rate and the remaining balance would be substantially offset by valuation allowances. As of July 2, 2011, unrecognized tax benefits were $175,151,000, of which approximately $111,299,000, if recognized, would favorably impact the effective tax rate, and the remaining balance would be substantially offset by valuation allowances. In accordance with the Company's accounting policy, accrued interest and penalties, if any, related to unrecognized tax benefits are recorded as a component of income tax expense. The accrual for unrecognized tax benefits included accrued interest expense and penalties of $24,664,000 and $24,640,000, net of applicable state tax benefit, as of the end of fiscal 2012 and 2011, respectively.

Reconciliations of the beginning and ending accrual balances for unrecognized tax benefits are as follows:



	June 30, 2012			July 2, 2011
	(Thousands)
Balance at beginning of year	$	175,151		$	132,828
Additions for tax positions taken in prior periods, including interest	19,262			40,218
Reductions for tax positions taken in prior periods, including interest	(35,898		)	(16,837		)
Additions for tax positions taken in current period	8,179			11,041
Reductions related to cash settlements with taxing authorities	(7,460		)	(616		)
Reductions related to the lapse of statute of limitations	(3,810		)	(1,565		)
Additions (reductions) related to foreign currency translation	(8,798		)	10,082
Balance at end of year	$	146,626		$	175,151

The evaluation of income tax positions requires management to estimate the ability of the Company to sustain its position and estimate the final benefit to the Company. To the extent that these estimates do not reflect the actual outcome there could be an impact on the consolidated financial statements in the period in which the position is settled, the statute of limitations expire or new information becomes available as the impact of these events are recognized in the period in which they occur. It is difficult to estimate the period in which the amount of a tax position will change as settlement may include administrative and legal proceedings whose timing the Company cannot control. The effects of settling tax positions with tax authorities and statute expirations may significantly impact the accrual for income tax contingencies. Within the next twelve months, management estimates that approximately $46,965,000 of tax contingencies will be settled primarily through agreement with the tax authorities for tax positions related to valuation matters and positions related to acquired entities; such matters are common to multinational companies. The expected cash payment related to the settlement of these contingencies is $12,925,000.

The Company conducts business globally and consequently files income tax returns in numerous jurisdictions including those listed in the following table. It is also routinely subject to audit in these and other countries. The Company is no longer subject to audit in its major jurisdictions for periods prior to fiscal year 2005. The open years, by major jurisdiction, are as follows:



Jurisdiction		Fiscal Year
Singapore		2005 – 2012
Hong Kong		2006 – 2012
United States (federal and state), United Kingdom and Taiwan		2007 – 2012
Netherlands		2008 – 2012
Belgium and Germany		2010 – 2012