Income taxes

12 Months Ended

Jun. 27, 2020

Income taxes

Income taxes

9. Income taxes

The components of income tax (benefit) 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, suspended interest deductions, certain accrued amounts and depreciation and amortization, net of any changes to valuation allowances.

	Years Ended
	June 27, 2020		June 29, 2019		June 30, 2018
	(Thousands)
Current:
Federal	$	(127,312)	$	(18,611)	$	255,810
State and local		17,983		8,523		(3,174)
Foreign		22,816		78,988		104,156
Total current taxes		(86,513)		68,900		356,792
Deferred:
Federal		14,844		17,725		(70,172)
State and local		4,450		580		(10,551)
Foreign		(31,355)		(25,048)		11,897
Total deferred taxes		(12,061)		(6,743)		(68,826)
Income tax (benefit) expense	$	(98,574)	$	62,157	$	287,966

The tax provision is computed based upon income (loss) from continuing operations before income taxes from both U.S. and foreign operations. U.S. loss from continuing operations before income taxes was $253.3 million, $68.5 million and $385.1 million, in fiscal 2020, 2019 and 2018, respectively, and foreign income from continuing operations before income taxes was $125.2 million, $310.8 million and $530.2 million in fiscal 2020, 2019 and 2018, respectively.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 pandemic, which among other things contains numerous income tax provisions. The CARES Act allows net operating losses incurred in fiscal years 2019, 2020, and 2021 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company expects to utilize this carryback provision, which is generating a tax provision benefit in fiscal 2020.

The Company changed its historical assertion as of June 27, 2020, so that all of its unremitted foreign earnings are permanently reinvested as the current year remitted foreign earnings have provided sufficient liquidity for the foreseeable future. The Company believes any unrecorded liabilities related to this assertion are not material.

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

	Years Ended
	June 27, 2020		June 29, 2019		June 30, 2018
U.S. federal statutory rate	21.0	%	21.0	%	28.0	%
State and local income taxes, net of federal benefit	4.7		0.3		(6.1)
Tax on foreign income, net of valuation allowances	5.1		(0.5)		(23.5)
Establishment/release of valuation allowances, net of U.S. tax expense	(28.9)		(3.2)		(0.1)
Change in unrecognized tax benefit reserves	20.3		17.9		(7.4)
Tax audit settlements	(5.6)		0.9		4.5
Impact of the Act - transition tax	—		7.1		158.5
Impact of the Act - deferred tax effects	—		(5.6)		4.2
Impact of the CARES Act	10.3		—		—
Impairment of investments, including goodwill	57.1		(8.0)		35.1
Other, net	(7.1)		(4.2)		5.3
Effective tax rate - continuing operations	76.9	%	25.7	%	198.5	%

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 previously 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 loss before income taxes from continuing operations was a benefit of 76.9% in fiscal 2020 as compared with an effective tax rate of 25.7% of expense on fiscal 2019 income before income taxes. Included in the fiscal 2020 effective tax rate is a tax benefit arising from the reduction in value of certain businesses for tax purposes, partially offset by the establishment of valuation allowances against deferred tax assets that the Company no longer expects to realize the future benefit from.

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” on the consolidated balance sheets, are as follows:

	June 27,		June 29,
	2020		2019
	(Thousands)
Deferred tax assets:
Federal, state and foreign net operating loss carry-forwards	$	237,200	$	241,747
Depreciation and amortization		16,585		1,583
Inventories valuation		35,509		28,441
Operating lease liabilities		67,814		—
Receivables valuation		11,868		9,138
Various accrued liabilities and other		102,298		41,268
		471,274		322,177
Less — valuation allowances		(283,721)		(231,463)
		187,553		90,714
Deferred tax liabilities:
Operating lease assets		(66,316)		—
Net deferred tax assets	$	121,237	$	90,714

The change in valuation allowances in fiscal 2020 from fiscal 2019 was primarily related to the $61.4 million establishment of valuation allowance as a result of changes to management’s expectation of its ability to realize certain tax assets in the United States.

As of June 27, 2020, the Company had net operating and capital loss carry-forwards of approximately $1.28 billion, of which $33.4 million will expire during fiscal 2021 and fiscal 2022, substantially all of which have full valuation allowances, $246.3 million have expiration dates ranging from fiscal 2023 to fiscal 2040, and the remaining $999.1 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 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 27, 2020, unrecognized tax benefits were $116.5 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $20.2 million and $23.4 million, net of applicable state tax benefits, as of the end of fiscal 2020 and 2019, respectively.

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

	June 27, 2020		June 29, 2019
	(Thousands)
Balance at beginning of year	$	123,765	$	84,357
Additions for tax positions taken in prior periods		10,456		44,429
Reductions for tax positions taken in prior periods		(33,880)		(5,237)
Reductions related to tax rate change		—		(254)
Additions for tax positions taken in current period		23,611		11,343
Reductions related to settlements with taxing authorities		(5,480)		(2,001)
Reductions related to the lapse of applicable statutes of limitations		(21,339)		(6,787)
Adjustments related to foreign currency translation		(841)		(2,085)
Balance at end of year	$	96,292	$	123,765

The evaluation of uncertain income tax positions requires management to estimate the ability of the Company to sustain its position with applicable tax authorities 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 where the Company cannot control the timing. 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 $16.1 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 $1.7 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)	2016 - 2020
Taiwan	2015 - 2020
Hong Kong	2014 - 2020
Germany	2010 - 2020
Singapore	2016 - 2020
Belgium	2017 - 2020
United Kingdom	2018 - 2020
Canada	2011 - 2020

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 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.