Income Taxes

The provision for income taxes consists of the following (in thousands):



	Fiscal years ended
	January 1, 2012			January 2, 2011			January 3, 2010
Current:
Federal	$	447,126		$	268,571		$	15,531
State	12,708			20,557			7,354
Foreign	104,760			40,490			78,490
	564,594			329,618			101,375
Deferred:
Federal	(60,934		)	(143,406		)	(11,271		)
State	(49		)	(23,931		)	139
Foreign	(13,847		)	(4,990		)	(1,752		)
	(74,830		)	(172,327		)	(12,884		)
Provision for income taxes	$	489,764		$	157,291		$	88,491

Income before provision for income taxes consisted of the following (in thousands):



	Fiscal years ended
	January 1, 2012		January 2, 2011		January 3, 2010
United States	$	1,242,529	$	1,273,081	$	412,646
International	234,225		184,352		91,155
Total	$	1,476,754	$	1,457,433	$	503,801

The Company’s provision for income taxes differs from the amount computed by applying the federal statutory rates to income before taxes as follows:



	Fiscal years ended
	January 1, 2012		January 2, 2011		January 3, 2010
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.5		(0.6	)	0.8
Non-deductible share-based compensation expense	0.4		0.2		1.9
Valuation allowance	0.4		(17.4	)	(8.0	)
Tax-exempt interest income	(0.9	)	(0.7	)	(2.2	)
Foreign earnings at other than U.S. rates	(1.8	)	(5.1	)	(10.8	)
Other	(0.4	)	(0.6	)	0.9
Effective income tax rates	33.2	%	10.8	%	17.6	%

The Company’s earnings and taxes resulting from foreign operations are largely attributable to its Irish, Chinese, Israeli and Japanese entities.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax return reporting purposes. Significant components of the Company’s net deferred tax assets were as follows (in thousands):



	January 1, 2012			January 2, 2011
Deferred tax assets:
Deferred income on shipments to distributors and retailers and deferred revenue recognized for tax purposes	$	32,833		$	35,119
Accruals and reserves not currently deductible	62,812			77,998
Depreciation and amortization not currently deductible	59,464			41,434
Deductible share-based compensation	62,864			66,961
Unrealized loss on investments	9,620			18,105
Unrealized foreign exchange loss	78,360			78,753
Net operating loss carryforwards	33,871			25,215
Tax credit carryforward	16,939			6,072
Other	26,747			21,748
Gross deferred tax assets	383,510			371,405
Valuation allowance	(25,614		)	(11,198		)
Deferred tax assets, net of valuation allowance	357,896			360,207

Deferred tax liabilities:
Acquired intangible assets	(1,864		)	(5,685		)
Unrealized gain on investments	(6,201		)	(16,913		)
Unrealized foreign exchange gain	(66,006		)	(92,144		)
U.S. taxes provided on unremitted earnings of foreign subsidiaries	(28,844		)	(28,844		)
Total deferred tax liabilities	(102,915		)	(143,586		)
Net deferred tax assets	$	254,981		$	216,621

The Company assesses its valuation allowance recorded against deferred tax assets on a regular and periodic basis. The assessment of valuation allowance against deferred tax assets requires estimations and significant judgment. The Company continues to assess and adjust its valuation allowance based on operating results and market conditions. During fiscal year 2011, based on weighing both the positive and negative evidence available, including but not limited to, earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets, the Company determined that it is able to realize most of its deferred tax assets with the exception of certain loss and credit carryforwards. During fiscal year 2010, the Company determined that it was able to realize most of the U.S. federal and state deferred tax assets with the exception of certain net operating losses. As a result, the Company released $306.0 million of valuation allowance related to federal and state deferred tax assets in fiscal year 2010.

The Company has federal and state net operating loss carryforwards of $62.9 million and $183.9 million, respectively. The net operating losses will begin to expire in fiscal year 2014 if not utilized. The Company also has California research credit carryforwards of $19.1 million. California research credit can be carried forward to future years indefinitely. Some of these carryforwards are subject to annual limitations, including under Section 382 and Section 383 of the U.S. Internal Revenue Code of 1986, as amended, for U.S. tax purposes and similar state provisions.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the earnings are considered indefinitely invested outside of the U.S. No provision has been made for U.S. income taxes or foreign withholding taxes on $361.8 million of cumulative unremitted earnings of certain foreign subsidiaries as of January 1, 2012, since the Company intends to indefinitely reinvest these earnings outside the U.S. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings was not practicable. If these earnings were distributed to the Company’s U.S. entity, the Company would be subject to additional U.S. income taxes and foreign withholding taxes would be reduced by available foreign tax credits.

The tax benefit associated with the exercise of stock options was applied to capital in excess of par value in the amount of $20.5 million, $26.8 million and zero in fiscal years 2011, 2010 and 2009, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



Balance at January 3, 2010	$	179,764
Additions:
Tax positions related to current year	10,547
Tax positions related to prior years	14,584
Reductions:
Tax positions related to prior years	(28,597		)
Expiration of statute of limitations	(4,238		)
Balance at January 2, 2011	172,060
Additions:
Tax positions related to current year	10,090
Tax positions related to prior years	4,489
Reductions:
Tax positions related to prior years	(296		)
Expiration of statute of limitations	(517		)
Balance at January 1, 2012	$	185,826

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, is $81.1 million at January 1, 2012. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties included in the Company’s liability related to unrecognized tax benefits at January 1, 2012 and January 2, 2011 was $34.1 million and $29.7 million, respectively. Interest and penalties, net included in the Company’s tax expense for fiscal years 2011, 2010 and 2009 was $3.2 million, ($2.4) million and $6.4 million, respectively.

It is reasonably possible that the unrecognized tax benefits could decrease by approximately $3.1 million within the next 12 months as a result of the expiration of statutes of limitation. The Company is currently under audit by several tax authorities. Because timing of the resolution and/or closure of these audits is highly uncertain it is not possible to estimate other changes to the amount of unrecognized tax benefits for positions existing at January 1, 2012.

The Company is subject to U.S. federal income tax as well as income taxes in many state and foreign jurisdictions. In October 2009, the Internal Revenue Service commenced an examination of the Company’s federal income tax returns for fiscal years 2005 through 2008. The timing of a complete resolution is not certain within the next twelve months. In addition, the Company is currently under audit by various state and international tax authorities. The Company cannot reasonably estimate the outcome of these examinations, or that it will not have a material effect on the Company’s financial position, results of operations or liquidity. The statutes of limitation in state jurisdictions generally remain open for tax years 2002 through 2010. The major foreign jurisdictions generally remain open for examination for tax years 2005 through 2011.

In 2011, certain foreign subsidiaries of the Company were under income tax holidays. The aggregate dollar and per share effects of these tax holidays was immaterial to the Company’s financial results for fiscal years 2011, 2010 and 2009.