Provision for Income Taxes

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



	Fiscal years ended
	December 29, 2013			December 30, 2012			January 1, 2012
Current:
Federal	$	359,012		$	74,258		$	447,126
State	9,972			(824		)	12,708
Foreign	103,981			101,710			104,760
	472,965			175,144			564,594
Deferred:
Federal	27,328			45,383			(60,934		)
State	2,645			1,634			(49		)
Foreign	(29,446		)	(12,649		)	(13,847		)
	527			34,368			(74,830		)
Provision for income taxes	$	473,492		$	209,512		$	489,764

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



	Fiscal years ended
	December 29, 2013		December 30, 2012		January 1, 2012
United States	$	1,436,470	$	518,509	$	1,242,529
International	79,679		108,407		234,225
Total	$	1,516,149	$	626,916	$	1,476,754

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
	December 29, 2013		December 30, 2012		January 1, 2012
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.6		(0.3	)	0.5
Non-deductible share-based compensation expense	0.5		1.3		0.4
Valuation allowance	(0.1	)	0.2		0.4
Tax-exempt interest income	(0.7	)	(1.9	)	(0.9	)
Foreign earnings at other than U.S. rates	(2.9	)	(1.2	)	(1.8	)
Other	(1.2	)	0.3		(0.4	)
Effective income tax rates	31.2	%	33.4	%	33.2	%

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):



	December 29, 2013			December 30, 2012
Deferred tax assets:
Deferred income on shipments to distributors and retailers and deferred revenue recognized for tax purposes	$	68,117		$	46,679
Accruals and reserves not currently deductible	63,236			51,636
Depreciation and amortization not currently deductible	81,245			54,474
Deductible share-based compensation	28,684			61,014
Unrealized loss on investments	13,620			9,879
Unrealized foreign exchange loss	8,061			45,122
Net operating loss carryforwards	36,422			40,092
Tax credit carryforwards	37,905			25,187
Other	24,667			22,218
Gross deferred tax assets	361,957			356,301
Valuation allowance	(52,105		)	(37,259		)
Deferred tax assets, net of valuation allowance	309,852			319,042

Deferred tax liabilities:
Acquired intangible assets	(2,701		)	(3,820		)
Unrealized gain on investments	(5,939		)	(9,324		)
Unrealized foreign exchange gain	(3,127		)	(43,327		)
U.S. taxes provided on unremitted earnings of foreign subsidiaries	(28,844		)	(28,844		)
Total deferred tax liabilities	(40,611		)	(85,315		)
Net deferred tax assets	$	269,241		$	233,727

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 years 2013, 2012 and 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.

The Company has federal and state net operating loss carryforwards of $86.4 million and $136.2 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 $54.9 million. California research credits 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 $752.2 million of cumulative unremitted earnings of certain foreign subsidiaries as of December 29, 2013, 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 from share-based plans was applied to capital in excess of par value in the amount of $0.6 million, $11.7 million and $20.5 million in fiscal years 2013, 2012 and 2011, respectively.

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



Balance at January 1, 2012	$	185,826
Additions:
Tax positions related to current year	8,164
Tax positions related to prior years	942
Reductions:
Tax positions related to prior years	(7,186		)
Expiration of statute of limitations	(2,003		)
Foreign currency translation adjustment	(6,221		)
Balance at December 30, 2012	179,522
Additions:
Tax positions related to current year	8,255
Tax positions related to prior years	15,938
Reductions:
Tax positions related to prior years	(1,737		)
Expiration of statute of limitations	(7,419		)
Foreign currency translation adjustment	(9,309		)
Balance at December 29, 2013	$	185,250

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, is $92.1 million at December 29, 2013. 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 December 29, 2013 and December 30, 2012 was $32.7 million and $32.2 million, respectively. Interest and penalties, net, included in the Company’s tax expense was $2.2 million, $2.9 million and $3.2 million for fiscal years 2013, 2012 and 2011, respectively.

It is reasonably possible that the unrecognized tax benefits could decrease by approximately $10.2 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 December 29, 2013.

The Company is subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In February 2012, the Internal Revenue Service (“IRS”) completed its field audit of the Company’s federal income tax returns for the years 2005 through 2008 and issued the Revenue Agent’s Report. The most significant proposed adjustments are comprised of related party transactions between the Company’s U.S. parent entity and its foreign subsidiaries. The Company is contesting these adjustments through the IRS Appeals Office and cannot predict when a resolution will be reached.

The Company strongly believes the IRS’s position regarding the intercompany transactions is inconsistent with applicable tax laws, judicial precedents and existing Treasury regulations, and that the Company’s previously reported income tax provisions for the years in question are appropriate. The Company believes that an adequate provision has been made for the adjustments from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner that is not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

The IRS recently initiated an examination of the Company’s federal income tax returns for fiscal years 2009 through 2011. The Company does not expect a resolution of this audit to be reached during 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 provide assurance that the outcome of these examinations will not materially harm the Company’s financial position, results of operations or liquidity.