Provision for Income Taxes

The provision for income taxes consists of the following:



	Years ended
	January 3, 2016			December 28, 2014			December 29, 2013
	(In thousands)
Current:
Federal	$	71,509		$	388,532		$	359,012
State	(12,487		)	12,404			9,972
Foreign	87,015			88,563			103,981
	146,037			489,499			472,965
Deferred:
Federal	(9,183		)	10,544			27,328
State	1,458			(13,250		)	2,645
Foreign	2,834			(5,209		)	(29,446		)
	(4,891		)	(7,915		)	527
Provision for income taxes	$	141,146		$	481,584		$	473,492

Income before income taxes consisted of the following:



	Years ended
	January 3, 2016		December 28, 2014		December 29, 2013
	(In thousands)
United States	$	417,685	$	1,319,528	$	1,436,470
Foreign	111,939		169,502		79,679
Total	$	529,624	$	1,489,030	$	1,516,149

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



	Years ended
	January 3, 2016		December 28, 2014		December 29, 2013
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	(2.4	)	0.8		0.6
Non-deductible share-based compensation expense	3.6		1.0		0.5
Valuation allowance	(0.4	)	0.8		(0.1	)
Tax-exempt interest income	(1.2	)	(0.6	)	(0.7	)
Foreign earnings at other than U.S. rates	(0.5	)	(2.2	)	(2.9	)
Settlements with tax authorities	(4.2	)	(1.7	)	—
R&D credit	(2.1	)	(1.3	)	(1.3	)
Other	(1.1	)	0.5		0.1
Effective income tax rates	26.7	%	32.3	%	31.2	%

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



	January 3, 2016			December 28, 2014
	(In thousands)
Deferred tax assets:
Deferred income on shipments to distributors and retailers and deferred revenue recognized for tax purposes	$	45,542		$	65,002
Accruals and reserves not currently deductible	94,625			98,342
Depreciation and amortization not currently deductible	92,380			96,735
Deductible share-based compensation	40,939			32,679
Unrealized loss on investments	12,782			10,045
Unrealized foreign exchange loss	9,301			10,357
Net operating loss carryforwards	152,276			196,809
Tax credit carryforwards	85,047			61,134
Other	14,389			22,100
Gross deferred tax assets	547,281			593,203
Valuation allowance	(111,403		)	(96,128		)
Deferred tax assets, net of valuation allowance	435,878			497,075

Deferred tax liabilities:
Acquired intangible assets	(81,551		)	(146,955		)
Unrealized gain on investments	(480		)	(2,007		)
U.S. taxes provided on unremitted earnings of foreign subsidiaries	(28,844		)	(28,844		)
Total deferred tax liabilities	(110,875		)	(177,806		)
Net deferred tax assets	$	325,003		$	319,269

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 2015, 2014 and 2013, 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 $392.5 million and $442.0 million, respectively. State net operating loss carryforwards of $6.7 million will expire in 2016 if not utilized. The Company also has federal and state research credit carryforwards of $15.6 million and $108.3 million, respectively. Federal research credits can be carried forward 20 years and will begin to expire in 2027 if not utilized. State research credits will begin to expire starting in 2021. 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 January 3, 2016, the Company had not made a provision for U.S. income taxes or foreign withholding taxes on $1.26 billion 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 $10.3 million, $45.1 million and $0.6 million in 2015, 2014 and 2013, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Years ended
	January 3, 2016			December 28, 2014			December 29, 2013
	(In thousands)
Balance, beginning of year	$	125,173		$	185,250		$	179,522
Additions:
Tax positions related to current year	11,813			17,656			8,255
Tax positions related to prior years	14,539			14,411			15,938
Foreign currency translation adjustment	1,906			—			—
Reductions:
Tax positions related to prior years	(9,772		)	(9,597		)	(1,737		)
Expiration of statute of limitations	(12,099		)	(8,039		)	(7,419		)
Settlements with taxing authorities	(27,393		)	(71,121		)	—
Foreign currency translation adjustment	—			(3,387		)	(9,309		)
Balance, end of year	$	104,167		$	125,173		$	185,250

The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $81.4 million as of January 3, 2016. 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 January 3, 2016 and December 28, 2014 was $10.4 million and $30.1 million, respectively. Interest and penalties, net, included in the Company’s tax expense was ($8.1) million, ($0.2) million and $2.2 million for 2015, 2014 and 2013, respectively.

It is reasonably possible that the unrecognized tax benefits could decrease by approximately $6.9 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 January 3, 2016.

The Company is subject to U.S. federal income tax as well as income taxes in multiple state and foreign jurisdictions. In 2015, the Company received and signed the closing agreement with the Internal Revenue Service (“IRS”) related to the examination of its federal income tax returns for the years 2009 through 2011, and finalized audits for certain periods with the California Franchise Tax Board and other various states’ tax authorities. In 2015 and 2014, the Company recorded benefits of $37.4 million and $25.2 million, respectively, as a result of several audit settlements.

The Company is currently under audit by various state and international tax authorities. While the Company believes that it has an adequate provision for the years under audit, there is still a possibility that an adverse outcome from these matters could have a material effect on the Company’s financial position, results of operations or liquidity. 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 Protecting Americans from Tax Hikes (PATH) Act of 2015 enacted on December 18, 2015 extended and made permanent the federal R&D tax credit. As a result, the Company’s income tax provision for 2015 includes a tax benefit that reduced the Company’s effective annual tax rate. The Company recorded federal R&D tax benefits of $11.2 million, $18.7 million and $19.0 million in 2015, 2014 and 2013, respectively.

The Company has a tax holiday in Malaysia that expires in December 2028. The impact of the tax holiday was immaterial to income taxes and earnings per share in the Company’s Consolidated Financial Statements.