Provision for Income Taxes

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



	Fiscal years ended
	December 28, 2014			December 29, 2013			December 30, 2012
Current:
Federal	$	388,532		$	359,012		$	74,258
State	12,404			9,972			(824		)
Foreign	88,563			103,981			101,710
	489,499			472,965			175,144
Deferred:
Federal	10,544			27,328			45,383
State	(13,250		)	2,645			1,634
Foreign	(5,209		)	(29,446		)	(12,649		)
	(7,915		)	527			34,368
Provision for income taxes	$	481,584		$	473,492		$	209,512

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



	Fiscal years ended
	December 28, 2014		December 29, 2013		December 30, 2012
United States	$	1,319,528	$	1,436,470	$	518,509
Foreign	169,502		79,679		108,407
Total	$	1,489,030	$	1,516,149	$	626,916

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 28, 2014		December 29, 2013		December 30, 2012
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.8		0.6		0.3
Non-deductible share-based compensation expense	1.0		0.5		1.3
Valuation allowance	0.8		(0.1	)	0.2
Tax-exempt interest income	(0.6	)	(0.7	)	(1.9	)
Foreign earnings at other than U.S. rates	(2.2	)	(2.9	)	(1.2	)
Settlements with tax authorities	(1.7	)	—		(0.6	)
Other	(0.8	)	(1.2	)	0.3
Effective income tax rates	32.3	%	31.2	%	33.4	%

The Company’s earnings and taxes resulting from foreign operations are largely attributable to its Chinese, Irish, 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 28, 2014			December 29, 2013
Deferred tax assets:
Deferred income on shipments to distributors and retailers and deferred revenue recognized for tax purposes	$	65,002		$	68,117
Accruals and reserves not currently deductible	98,342			63,236
Depreciation and amortization not currently deductible	96,735			81,245
Deductible share-based compensation	32,679			28,684
Unrealized loss on investments	10,045			13,620
Unrealized foreign exchange loss	10,357			8,061
Net operating loss carryforwards	196,809			36,422
Tax credit carryforwards	61,134			37,905
Other	22,100			24,667
Gross deferred tax assets	593,203			361,957
Valuation allowance	(96,128		)	(52,105		)
Deferred tax assets, net of valuation allowance	497,075			309,852

Deferred tax liabilities:
Acquired intangible assets	(146,955		)	(2,701		)
Unrealized gain on investments	(2,007		)	(5,939		)
Unrealized foreign exchange gain	—			(3,127		)
U.S. taxes provided on unremitted earnings of foreign subsidiaries	(28,844		)	(28,844		)
Total deferred tax liabilities	(177,806		)	(40,611		)
Net deferred tax assets	$	319,269		$	269,241

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 2014, 2013 and 2012, 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 $513.2 million and $453.7 million, respectively. The net operating losses will begin to expire in fiscal year 2015 if not utilized. The Company also has Federal and California research credit carryforwards of $13.1 million and $77.3 million, respectively. Federal research credits can be carried forward 20 years, while 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.

As of December 28, 2014, the Company had not made a provision for U.S. income taxes or foreign withholding taxes on $969.1 million of undistributed earnings of foreign subsidiaries as the Company intends to indefinitely reinvest these earnings outside the U.S. to fund its international capital expenditures and operating requirements. The Company determined that it is not practicable to calculate the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings. If these earnings were distributed to the U.S., the Company would be subject to additional U.S. income taxes and foreign withholding taxes reduced by any available foreign tax credits.

The tax benefit from share-based plans was applied to capital in excess of par value in the amount of $45.1 million, $0.6 million and $11.7 million in fiscal years 2014, 2013 and 2012, respectively.

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



	Fiscal years ended
	December 28, 2014			December 29, 2013			December 30, 2012
Balance, beginning of year	$	185,250		$	179,522		$	185,826
Additions:
Tax positions related to current year	17,656			8,255			8,164
Tax positions related to prior years	14,411			15,938			942
Reductions:
Tax positions related to prior years	(9,597		)	(1,737		)	(7,186		)
Expiration of statute of limitations	(8,039		)	(7,419		)	(2,003		)
Settlements with taxing authorities	(71,121		)	—			—
Foreign currency translation adjustment	(3,387		)	(9,309		)	(6,221		)
Balance, end of year	$	125,173		$	185,250		$	179,522

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $100.4 million as of December 28, 2014. 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 as of December 28, 2014 and December 29, 2013 was $30.1 million and $32.7 million, respectively. Interest and penalties, net, included in the Company’s tax expense was ($0.2) million, $2.2 million and $2.9 million for fiscal years 2014, 2013 and 2012, respectively.

It is reasonably possible that the unrecognized tax benefits could decrease by approximately $56.2 million within the next 12 months as a result of the expiration of statutes of limitations and the settlement of income tax audits. The Company is currently under audit by several tax authorities in which the timing of the resolution and/or closure of these audits is highly uncertain. Therefore it is not possible to estimate other changes to the amount of unrecognized tax benefits for positions existing as of December 28, 2014.

The Company is subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In August 2014, the Company received and signed the closing agreement with the Internal Revenue Service (“IRS”) relating to its federal income tax returns for the years 2005 through 2008. In fiscal year 2014, the Company recorded a benefit of $25.2 million as a result of several audit settlements.

The IRS is currently conducting an examination of the Company’s federal income tax returns for fiscal years 2009 through 2011. Though the Company can reasonably expect the current cycle to be resolved within the next 12 months, the timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. 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.

The Company has a tax holiday in Malaysia that expires in December 2023. The impact of the tax holiday was immaterial to income taxes and earnings per share in the Company’s Consolidated Financial Statements.