INCOME TAXES

Income Tax Provisions

For financial reporting purposes, earnings before income taxes consists of the following:



	2015		2014		2013
	(In thousands)
U.S.	$	818,244	$	1,287,371	$	1,351,947
Foreign	189,903		188,253		195,508
Total	$	1,008,147	$	1,475,624	$	1,547,455

The income tax provision / (benefit) for each fiscal year consists of the following:



	2015			2014		2013
	(In thousands)
U.S. federal income taxes	$	285,807		$	433,795	$	439,667
State and local income taxes	(2,737		)	55,736		69,759
Foreign income taxes	38,304			54,560		45,602
Total	$	321,374		$	544,091	$	555,028

The current and deferred components of the income tax provisions for each fiscal year are as follows:



	2015			2014			2013
	(In thousands)
Current	$	327,639		$	574,760		$	582,889
Deferred	(6,265		)	(30,669		)	(27,861		)
Total	$	321,374		$	544,091		$	555,028

The deferred tax provisions result from the effects of net changes during the year in deferred tax assets and liabilities arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Deferred Tax Assets and Liabilities

Significant components of Sysco’s deferred tax assets and liabilities are as follows:



	June 27, 2015			June 28, 2014
	(In thousands)
Deferred tax liabilities:
Excess tax depreciation and basis differences of assets	$	381,875		$	416,417
Goodwill and intangible assets	224,943			211,434
Other	23,449			15,171
Total deferred tax liabilities	630,267			643,022
Deferred tax assets:
Net operating tax state loss carryforwards	47,958			20,123
Benefit on unrecognized tax benefits	16,270			22,170
Pension	264,780			287,046
Share-based compensation	42,569			41,262
Deferred compensation	35,573			33,280
Self-insured liabilities	65,617			65,002
Receivables	38,410			47,688
Inventory	68,186			62,799
Cash flow hedge	74,900			56,826
Other	29,667			26,471
Total deferred tax assets	683,930			662,667
Total net deferred tax (assets)	$	(53,663	)	$	(19,645	)

The company’s net operating tax loss carryforwards as of June 27, 2015 and June 28, 2014 consisted primarily of state net operating tax loss carryforwards. The state net operating tax loss carryforwards outstanding as of June 27, 2015 expire in fiscal years 2017 through 2035. There were no valuation allowances recorded for the state tax loss carryforwards as of June 27, 2015 and June 28, 2014 because management believes it is more likely than not that these benefits will be realized based on utilization forecasts.

Effective Tax Rates

Reconciliations of the statutory federal income tax rate to the effective income tax rates for each fiscal year are as follows:



	2015		2014		2013
U.S. statutory federal income tax rate	35.00	%	35.00	%	35.00	%
State and local income taxes, net of any applicable federal income tax benefit	0.91		2.82		2.59
Foreign tax rate differential	(2.84	)	(1.66	)	(1.22	)
Other	(1.19	)	0.71		(0.50	)
	31.88	%	36.87	%	35.87	%

The effective tax rate of 31.9% for fiscal 2015 was favorably impacted by lower earnings in the U.S. primarily due to costs associated with the termination of the US Foods proposed merger. The lower U.S. earnings resulted in a more significant favorable impact on the effective tax rate from the indefinitely reinvested foreign earnings due to lower foreign statutory tax rates as compared to the domestic tax rate. The additional cost associated with the proposed US Foods merger resulted in lower state taxes.

The effective tax rate of 36.9% for fiscal 2014 was negatively impacted primarily by two items. First, a non-deductible penalty, that the company incurred, had an unfavorable tax impact of $6.2 million. Second, we recorded net tax expense of $5.2 million for tax and interest related to various federal, foreign and state uncertain tax positions. This negative impact was partially offset by the recording of $5.7 million of tax benefit related to disqualifying dispositions of Sysco stock pursuant to share-based compensation arrangements. Indefinitely reinvested earnings taxed at foreign statutory rates less than our domestic tax rate also had the impact of reducing the effective tax rate.

The effective tax rate for fiscal 2013 was 35.9%. Indefinitely reinvested earnings taxed at foreign statutory tax rates that are lower than our domestic tax rate had the impact of reducing the effective tax rate.

Uncertain Tax Positions

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest and penalties, is as follows:



	2015			2014
	(In thousands)
Unrecognized tax benefits at beginning of year	$	49,180		$	108,337
Additions for tax positions related to prior years	797			2,128
Reductions for tax positions related to prior years	(8,001		)	(41,802		)
Reductions due to settlements with taxing authorities	(4,430		)	(19,483		)
Unrecognized tax benefits at end of year	$	37,546		$	49,180

As of June 27, 2015, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $33.4 million. The expense recorded for interest and penalties related to unrecognized tax benefits in fiscal 2015 was not material.

As of June 28, 2014, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $36.7 million. The expense recorded for interest and penalties related to unrecognized tax benefits in fiscal 2014 was $14.8 million. In the fourth quarter of fiscal 2014, we reclassified a receivable that would arise upon the resolution of an unrecognized tax benefit from a gross position in other assets to a net position in other long-term liabilities on our consolidated balance sheet due to a change in circumstances related to transfer pricing positions

If Sysco were to recognize all unrecognized tax benefits recorded as of June 27, 2015, approximately $27.7 million of the $37.5 million reserve would reduce the effective tax rate. If Sysco were to recognize all unrecognized tax benefits recorded as of June 28, 2014, approximately $35.1 million of the $49.2 million reserve would reduce the effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefits with respect to certain of the company’s unrecognized tax positions will increase or decrease in the next twelve months either because Sysco’s positions are sustained on audit or because the company agrees to their disallowance. Items that may cause changes to unrecognized tax benefits primarily include the consideration of various filing requirements in various states and the allocation of income and expense between tax jurisdictions. In addition, the amount of unrecognized tax benefits recognized within the next twelve months may decrease due to the expiration of the statute of limitations for certain years in various jurisdictions; however, it is possible that a jurisdiction may open an audit on one of these years prior to the statute of limitations expiring. At this time, an estimate of the range of the reasonably possible change cannot be made.

The IRS has open audits for Sysco’s 2006, 2007, 2008 and 2009 federal income tax returns. As of June 27, 2015, Sysco’s tax returns in the majority of the state and local jurisdictions and Canada are no longer subject to audit for the years before 2009. However, in Canada, the company remains open to transfer pricing adjustments back to 2003 for some entities. Certain tax jurisdictions require partial to full payment on audit assessments or the posting of letters of credit in order to proceed to the appeals process. Although the outcome of tax audits is generally uncertain, the company believes that adequate amounts of tax, including interest and penalties, have been accrued for any adjustments that may result from those open years.

Other

Undistributed income of certain consolidated foreign subsidiaries at June 27, 2015 amounted to $1.1 billion for which no deferred U.S. income tax provision has been recorded because Sysco intends to permanently reinvest such income in those foreign operations. An estimate of any U.S. income or foreign withholding taxes that may be applicable upon actual or deemed repatriation is not practical due to the complexities associated with the hypothetical calculation.