10. Income taxes

The components of income tax expense (“tax provision”) are included in the table below. The tax provision for deferred income taxes results from temporary differences arising primarily from net operating losses, inventories valuation, receivables valuation, certain accrued amounts and depreciation and amortization, net of any changes to valuation allowances.


	Years Ended
	June 29, 2019		June 30, 2018		July 1, 2017
	(Thousands)
Current:
Federal	$	(18,611)	$	255,810	$	(45,351)
State and local		8,523		(3,174)		4,209
Foreign		78,988		104,156		106,441
Total current taxes		68,900		356,792		65,299
Deferred:
Federal		17,725		(70,172)		(30,025)
State and local		580		(10,551)		(3,934)
Foreign		(25,048)		11,897		15,713
Total deferred taxes		(6,743)		(68,826)		(18,246)
Income tax expense	$	62,157	$	287,966	$	47,053

The tax provision is computed based upon income from continuing operations before income taxes from both U.S. and foreign operations. U.S. loss from continuing operations before income taxes was $68.5 million, $385.1 million and $174.3 million, in fiscal 2019, 2018 and 2017, respectively, and foreign income from continuing operations before income taxes was $310.8 million, $530.2 million and $484.7 million in fiscal 2019, 2018 and 2017, respectively.

See further discussion related to income tax expense for discontinued operations in Note 3.

On December 22, 2017 the U.S. federal government enacted tax legislation (the “Act”) which includes provisions to lower the corporate income tax rate from 35% to 21%, impose new taxes on certain foreign earnings, limit deductibility of certain U.S. costs and levy a one-time deemed repatriation tax on accumulated offshore earnings, among other provisions. The law is subject to interpretation and implementation guidance by both federal and state tax authorities, as well as amendments and technical corrections.

As a fiscal year-end taxpayer, certain provisions of the Act began to impact the Company in the second quarter of fiscal 2018, while other provisions began to impact the Company beginning in fiscal 2019. Additionally, new guidance from regulations, interpretation of the law and refinement of the Company’s estimates from ongoing analysis of tax positions may change the amounts recorded. Any changes to the amounts recorded will be reflected in income tax expense in the period they are identified, and may be material.

The Company changed its historical assertion as of June 29, 2019, so that all of its unremitted foreign earnings are no longer permanently reinvested as certain foreign earnings are expected to be repatriated in the future. The Company believes any unrecorded liabilities related to this partial change in assertion are not material, and has recorded deferred tax liabilities for those certain foreign earnings expected to be repatriated in the future.

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


	Years Ended
	June 29, 2019		June 30, 2018		July 1, 2017
U.S. federal statutory rate	21.0	%	28.0	%	35.0	%
State and local income taxes, net of federal benefit	0.3		(6.1)		(1.7)
Tax on foreign income, net of valuation allowances	(0.5)		(23.5)		(23.5)
Establishment/(release) of valuation allowances, net of U.S. tax expense	(3.2)		(0.1)		1.3
Change in unrecognized tax benefit reserves	17.9		(7.4)		3.6
Tax audit settlements	0.9		4.5		0.1
Impact of the Act - transition tax	7.1		158.5		—
Impact of the Act - deferred tax effects	(5.6)		4.2		—
Impairment of investments, including goodwill	(8.0)		35.1		—
Other, net	(4.2)		5.3		0.4
Effective tax rate - continuing operations	25.7	%	198.5	%	15.2	%

Tax rates on foreign income represents the impact of the difference between foreign rates and the U.S. federal statutory rate applied to foreign income or loss, foreign income taxed in the U.S. at rates other than its’ statutory rate, and the impact of valuation allowances established against the Company’s otherwise realizable foreign deferred tax assets, which are primarily net operating loss carry-forwards.

Avnet’s effective tax rate on income before income taxes from continuing operations was 25.7% in fiscal 2019 as compared with an effective tax rate of 198.5% in fiscal 2018. Included in the fiscal 2018 effective tax rate is a net tax benefit of $34.1 million related to the mix of income in lower tax jurisdictions. The fiscal 2019 effective tax rate is lower than the fiscal 2018 effective tax rate primarily due to the reduction in (i) the transition tax expense recorded under the requirements of the Act, and (ii) goodwill impairment.

The Company applies the guidance in ASC 740 Income Taxes, which requires management to use its judgment to the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Company examines all available evidence on a jurisdiction by jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels and types of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risks associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the Company’s served industries; (iii) jurisdictional specific limitations on the utilization of deferred tax assets including when such assets expire; and (iv) prudent and feasible tax planning strategies.

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


	June 29,		June 30,
	2019		2018
	(Thousands)
Deferred tax assets:
Federal, state and foreign net operating loss carry-forwards	$	241,747	$	296,282
Depreciation and amortization		1,583		—
Inventories valuation		28,441		26,125
Receivables valuation		9,138		8,332
Various accrued liabilities and other		41,268		39,419
		322,177		370,158
Less — valuation allowances		(231,463)		(239,483)
		90,714		130,675
Deferred tax liabilities:
Depreciation and amortization		—		(84,250)
Net deferred tax assets	$	90,714	$	46,425

The Company had $70.1 million of income tax related deferred charges included as a component of “other assets” in the consolidated balance sheet as of June 30, 2018, substantially all of which were reclassified to depreciation and amortization deferred tax assets in the table above, pursuant to the adoption of ASU 2016-16, as discussed in the significant accounting policies.

The change in valuation allowances in fiscal 2019 from fiscal 2018 was primarily related to the $5.3 million net release of valuation allowance as a result of changes to management’s expectation of its ability to realize certain tax assets.

As of June 29, 2019, the Company had net operating and capital loss carry-forwards of approximately $1.27 billion, of which $38.4 million will expire during fiscal 2020 and fiscal 2021, substantially all of which have full valuation allowances, $228.4 million have expiration dates ranging from fiscal 2022 to fiscal 2039, and the remaining $999.0 million have no expiration date. A significant portion of these losses are not expected to be realized in the foreseeable future and have valuation allowances against them. The carrying value of the Company’s net operating and capital loss carry-forwards is dependent upon the Company’s ability to generate sufficient future taxable income in certain foreign tax jurisdictions. In addition, the Company considers historic levels and types of income or losses, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances as discussed further above.

Estimated liabilities for unrecognized tax benefits are included in “Accrued expenses and other” and “Other liabilities” on the consolidated balance sheets. These contingent liabilities 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. As of June 29, 2019, unrecognized tax benefits were $147.2 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $23.4 million and $22.2 million, net of applicable state tax benefits, as of the end of fiscal 2019 and 2018, respectively.

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


	June 29, 2019		June 30, 2018
	(Thousands)
Balance at beginning of year	$	84,357	$	91,451
Additions for tax positions taken in prior periods		44,429		18,085
Reductions for tax positions taken in prior periods		(5,237)		(16,774)
Reductions related to tax rate change		(254)		—
Additions for tax positions taken in current period		11,343		12,869
Reductions related to settlements with taxing authorities		(2,001)		(5,468)
Reductions related to the lapse of applicable statutes of limitations		(6,787)		(11,951)
Adjustments related to foreign currency translation		(2,085)		565
Additions from acquisitions		—		(4,420)
Balance at end of year	$	123,765	$	84,357

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 applicable statutes 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 estimate for unrecognized tax benefits. Within the next twelve months, the Company estimates that approximately $38.1 million of these liabilities for unrecognized tax benefits will be settled by the expiration of the statutes of limitations or through agreement with the tax authorities for tax positions related to valuation matters and positions related to acquired entities. The expected cash payment related to the settlement of these contingencies is approximately $12.3 million.

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 2010. The years remaining subject to audit, by major jurisdiction, are as follows:


Jurisdiction		Fiscal Year
United States (Federal and state)		2015 - 2019
Taiwan		2014 - 2019
Hong Kong		2013 - 2019
Germany		2010 - 2019
Singapore		2015 - 2019
Belgium		2016 - 2019
United Kingdom		2017 - 2019
Canada		2011 - 2019

In connection with the sale of the TS business during fiscal 2017, several legal entities were sold to the Buyer and post-closing tax obligations are the responsibility of the Buyer. Under the terms of the sale agreement, the Company still maintains responsibility for certain pre-closing taxes including any amounts that arise from audits or other judgments received from tax authorities. The Company believes that its current estimates related to tax reserves and unrecognized tax benefits related to the TS business are reasonable, but future changes in facts and circumstances could results in significant changes in estimates that impact tax expense from discontinued operations in the period of change.