INCOME TAXES

Income Tax Provisions

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



	2016		2015		2014
	(In thousands)
U.S.	$	1,225,142	$	818,244	$	1,287,371
Foreign	207,865		189,903		188,253
Total	$	1,433,007	$	1,008,147	$	1,475,624

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



	2016		2015			2014
	(In thousands)
U.S. federal income taxes	$	429,658	$	285,807		$	433,795
State and local income taxes	34,032		(2,737		)	55,736
Foreign income taxes	19,695		38,304			54,560
Total	$	483,385	$	321,374		$	544,091

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



	2016		2015			2014
	(In thousands)
Current	$	385,183	$	327,639		$	574,760
Deferred	98,202		(6,265		)	(30,669		)
Total	$	483,385	$	321,374		$	544,091

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:



	July 2, 2016		June 27, 2015
	(In thousands)
Deferred tax assets:
Net operating loss state tax carryforwards	$	66,471	$	47,958
Benefit on unrecognized tax benefits	12,842		16,270
Pension	453,394		264,780
Share-based compensation	43,698		42,569
Deferred compensation	38,840		35,573
Self-insured liabilities	67,050		65,617
Receivables	41,574		38,410
Inventory	24,138		68,186
Cash flow hedge	7,421		74,900
Foreign currency remeasurement losses and currency hedge	47,632		—
Other	29,550		29,667
Total deferred tax assets	832,610		683,930
Deferred tax liabilities:
Excess tax depreciation and basis differences of assets	346,900		381,875
Goodwill and intangible assets	254,202		224,943
Other	51,130		23,449
Total deferred tax liabilities	652,232		630,267
Total net deferred tax assets	$	180,378	$	53,663

The company’s net operating tax loss carryforwards as of July 2, 2016 and June 27, 2015 consisted primarily of state net operating tax loss carryforwards. The state net operating tax loss carryforwards outstanding as of July 2, 2016 expire in fiscal years 2017 through 2035. There were no valuation allowances recorded for the state tax loss carryforwards as of July 2, 2016 and June 27, 2015 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:



	2016		2015		2014
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	1.79		0.91		2.82
Foreign tax rate differential	(2.40	)	(2.84	)	(1.66	)
Uncertain Tax Position ⁽¹⁾	(1.96	)	—		—
Other	1.30		(1.19	)	0.71
	33.73	%	31.88	%	36.87	%

⁽¹⁾ Uncertain tax positions are included within "Other" for fiscal 2015 and 2014.

The effective tax rate of 33.7% for fiscal 2016 was favorably impacted by the favorable resolution of tax contingencies resulting in tax benefits of $29.6 million ($10.6 million in tax and $19.0 million in interest). Costs associated with the redemption of the senior notes that had been issued in contemplation of the proposed merger with US Foods and charges incurred from the revision to the Company's business technology strategy resulted in lower state taxes. 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 of 31.9% for fiscal 2015 was favorably impacted by lower earnings in the U.S. primarily from the termination of the US Foods merger agreement, litigation costs, merger integration planning costs and interest expense attributable to the proposed merger of $693 million for the fiscal year. These costs were attributed to the company's U.S. earnings, which has the highest tax rate of all of the jurisdictions where it remits taxes. These losses created low levels of earnings in the U.S. and generated net operating losses in certain states, making the company's indefinitely reinvested earnings in its foreign operations a more predominant factor in its effective tax rate because those operations have lower tax rates. Additionally, Sysco made the decision to amend a prior U.S. tax return in order to maximize a foreign tax credit as opposed to a foreign tax deduction which also created benefit in our effective tax rate.

The effective tax rate of 36.9% for fiscal 2014 was negatively impacted primarily by two items. First, the company recorded tax expense of $6.2 million related to a non-deductible penalty that the company incurred. Second, the company 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.

Uncertain Tax Positions

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



	2016			2015
	(In thousands)
Unrecognized tax benefits at beginning of year	$	37,546		$	49,180
Additions for tax positions related to prior years	142			797
Reductions for tax positions related to prior years	(12,932		)	(8,001		)
Reductions due to settlements with taxing authorities	(142		)	(4,430		)
Unrecognized tax benefits at end of year	$	24,614		$	37,546

As of July 2, 2016, the gross amount of liability for accrued interest and penalties related to unrecognized tax benefits was $14.9 million. 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 2016 fiscal 2015 was not material.

If Sysco were to recognize all unrecognized tax benefits recorded as of July 2, 2016, approximately $16.9 million of the $24.6 million reserve would reduce the effective tax rate. 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. 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.

Sysco's federal tax returns for 2006 and subsequent tax years have been audited and/or have statutes of limitations that remain open for audit. As of July 2, 2016, 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 July 2, 2016 amounted to $1.2 billion, for which no deferred U.S. income tax provision has been recorded because Sysco intends to indefinitely 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.