Note 7: Income Taxes

The components of income (loss) before income taxes were as follows:


	June 28, 2015		June 29, 2014		June 30, 2013
	(in thousands)
United States	$	72,728	$	78,076	$	(46,392	)
Foreign		668,122		645,287		113,050

	$	740,850	$	723,363	$	66,658

Significant components of the provision (benefit) for income taxes attributable to income before income taxes were as follows:


	June 28, 2015			June 29, 2014			June 30, 2013
	(in thousands)
Federal:
Current	$	16,795		$	31,762		$	(1,096	)
Deferred		12,115			10,692			(60,172	)

	$	28,910		$	42,454		$	(61,268	)

State:
Current	$	1,376		$	3,192		$	3,332
Deferred		158			(869	)		(6,351	)

	$	1,534		$	2,323		$	(3,019	)

Foreign:
Current	$	61,551		$	49,273		$	20,640
Deferred		(6,722	)		(2,976	)		(3,574	)

	$	54,829		$	46,297		$	17,066

Total Provision (Benefit) for Income Taxes	$	85,273		$	91,074		$	(47,221	)

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Significant components of the Company’s net deferred tax assets and liabilities were as follows:


	June 28, 2015			June 29, 2014
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	129,234		$	170,028
Allowances and reserves		131,079			126,895
Equity-based compensation		21,086			18,019
Inventory valuation differences		15,167			16,257
Other		13,942			12,661

Gross deferred tax assets		310,508			343,860
Valuation allowance		(85,620	)		(74,439	)

Net deferred tax assets		224,888			269,421
Deferred tax liabilities:
Intangible Assets		(64,725	)		(87,329	)
Convertible debt		(130,991	)		(117,112	)
Temporary differences for captial assets		(37,635	)		(32,350	)
Amortization of goodwill		(12,502	)		(11,409	)
Unremitted earnings of foreign subsidiaries		(66,412	)		(40,286	)
Other		(6,100	)		(5,673	)

Gross deferred tax liabilities		(318,365	)		(294,159	)

Net deferred tax liabilities	$	(93,477	)	$	(24,738	)

The change in the gross deferred tax assets, gross deferred tax liabilities and valuation allowance between fiscal year 2015 and 2014 is primarily due to the reclassification of deferred tax assets as a result of the adoption of Accounting Standards Updated 2013-11, accrual for future tax liabilities due to the expected repatriation of foreign earnings of certain foreign subsidiaries for 2015, and convertible debt accretion, offset by a decrease in deferred tax liabilities related to amortization of intangible assets. Realization of the Company’s net deferred tax assets is based upon the weighting of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more-likely-than-not that such deferred tax assets will be realized with the exception of $85.6 million primarily related to California and certain foreign deferred tax assets.

The provisions related to the tax accounting for equity-based compensation prohibit the recognition of a deferred tax asset for an excess benefit that has not yet been realized. As a result, the Company will only recognize an excess benefit from equity-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, the Company continued to elect to account for the indirect benefits of equity-based compensation such as the research and development tax credit through the Consolidated Statement of Operations.

At June 28, 2015, the Company had federal net operating loss carryforwards of approximately $126.3 million. The majority of these losses will begin to expire in fiscal year 2019, and are subject to limitations on their utilization.

As of June 28, 2015, the Company had state net operating loss carryforwards of approximately $36.7 million. If not utilized, the net operating loss carryforwards will begin to expire in fiscal year 2016, and are subject to limitations on their utilization.

At June 28, 2015, the Company had federal tax credit carryforwards of approximately $134.3 million, of which $19.2 million will begin to expire in fiscal year 2017 and $113.3 million will begin to expire in fiscal year 2030. The remaining balance of $1.8 million of credits may be carried forward indefinitely. The tax benefits relating to approximately $20.3 million of federal tax credit carryforwards will be credited to additional paid-in-capital when recognized.

At June 28, 2015, the Company had state tax credit carryforwards of approximately $236.4 million. Substantially all state tax credit carryforwards may be carried forward indefinitely.

At June 28, 2015, the Company had federal and state capital loss carryforwards of approximately $12.0 million, which will begin to expire in fiscal year 2020.

At June 28, 2015, the Company had foreign net operating loss carryforwards of approximately $31.2 million, of which approximately $10.2 million may be carried forward indefinitely and $21.0 million will begin to expire in fiscal year 2016.

A reconciliation of income tax expense provided at the federal statutory rate (35% in fiscal years 2015, 2014, and 2013) to actual income tax expense (benefit) is as follows:


	June 28, 2015			June 29, 2014			June 30, 2013
	(in thousands)
Income tax expense computed at federal statutory rate	$	259,297		$	253,177		$	23,332
State income taxes, net of federal tax benefit		(8,611	)		1,884			(13,588	)
Foreign income taxed at different rates		(175,581	)		(164,130	)		(40,255	)
Tax credits		(24,416	)		(15,650	)		(42,593	)
State valuation allowance, net of federal tax benefit		8,594			(1,707	)		11,538
Equity-based compensation		28,845			23,167			20,318
Other permanent differences and miscellaneous items		(2,855	)		(5,667	)		(5,973	)

	$	85,273		$	91,074		$	(47,221	)

Effective from fiscal year 2014 through June 2023, the Company has a 10 year tax ruling in Switzerland for one of its foreign subsidiaries. In the prior years, the Company had a tax holiday in Switzerland which was effective from fiscal year 2003 through June 2013. The impact of the tax ruling decreased taxes by approximately $4.8 million, $7.4 million and $10.8 million for fiscal years 2015, 2014 and 2013, respectively. The benefit of the tax ruling on diluted earnings per share was approximately $0.03 in fiscal year 2015, $ 0.04 in fiscal year 2014 and $0.06 in fiscal year 2013.

Unremitted earnings of the Company’s foreign subsidiaries included in consolidated retained earnings aggregated to approximately $3.3 billion at June 28, 2015. These earnings are indefinitely reinvested in foreign operations. If these earnings were remitted to the United States, they would be subject to U.S. and foreign withholding taxes of approximately $859.0 million at current statutory rates. The Company’s federal income tax provision includes U.S. income taxes on certain foreign-based income.

As of June 28, 2015, the total gross unrecognized tax benefits were $363.6 million compared to $352.1 million as of June 29, 2014 and $333.1 million as of June 30, 2013. During fiscal year 2015, gross unrecognized tax benefits increased by approximately $11.4 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $276.8 million, $269.4 million and $257.7 million, as of June 28, 2015, June 29, 2014 and June 30, 2013 respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:


	(in thousands)
Balance as of June 24, 2012	$	343,837
Settlements and effective settlements with tax authorities		(3,422	)
Lapse of statute of limitations		(51,422	)
Increases in balances related to tax positions taken during prior periods		11,352
Decreases in balances related to tax positions taken during prior periods		(11,281	)
Increases in balances related to tax positions taken during current period		35,170
Tax positions assumed in Novellus transaction		8,880

Balance as of June 30, 2013		333,114
Lapse of statute of limitations		(16,048	)
Increases in balances related to tax positions taken during prior periods		6,225
Decreases in balances related to tax positions taken during prior periods		(4,182	)
Increases in balances related to tax positions taken during current period		33,003

Balance as of June 29, 2014		352,112
Settlements and effective settlements with tax authorities		(2,108	)
Lapse of statute of limitations		(9,376	)
Increases in balances related to tax positions taken during prior periods		3,729
Decreases in balances related to tax positions taken during prior periods		(12,615	)
Increases in balances related to tax positions taken during current period		31,810

Balance as of June 28, 2015	$	363,552

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $35.5 million, $29.5 million and $25.5 million cumulatively, for gross interest and penalties as of June 28, 2015, June 29, 2014 and June 30, 2013, respectively.

The Company is subject to audits by state and foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 28, 2015, tax years 2004-2014 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of the examinations in connection with all of its tax audits worldwide and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.