NOTE 8—INCOME TAXES

Total income tax provision (benefit) was allocated as follows:


	Year Ended
	December 29, 2013		December 30, 2012			December 25, 2011
	(In millions)
Income tax provision (benefit) attributable to income before income taxes	$	6.2	$	(0.9	)	$	12.2
Other comprehensive income		—		—			—

	$	6.2	$	(0.9	)	$	12.2

Income before income taxes for the years ended December 29, 2013, December 30, 2012, and December 25, 2011 consisted of the following:


	Year Ended
	December 29, 2013			December 30, 2012		December 25, 2011
	(In millions)
Income (loss) before income taxes:
U.S.	$	18.1		$	6.2	$	44.7
Foreign		(6.9	)		17.5		113.0

	$	11.2		$	23.7	$	157.7

Income tax provision (benefit) for the years ended December 29, 2013, December 30, 2012, and December 25, 2011 consisted of the following:


	Year Ended
	December 29, 2013			December 30, 2012			December 25, 2011
	(In millions)
Income tax provision (benefit):
Current:
U.S. federal	$	—		$	—		$	0.1
U.S. state and local		0.1			(0.2	)		0.1
Foreign		10.9			9.4			24.5

		11.0			9.2			24.7
Deferred:
U.S. federal		2.0			1.9			1.8
U.S. state and local		(0.3	)		0.2			(1.4	)
Foreign		(6.5	)		(12.2	)		(12.9	)

		(4.8	)		(10.1	)		(12.5	)
Total income tax provision (benefit):
U.S. federal		2.1			1.9			1.9
U.S. state and local		(0.3	)		—			(1.3	)
Foreign		4.4			(2.8	)		11.6

	$	6.2		$	(0.9	)	$	12.2

The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide effective tax rate on net income before income taxes is as follows:


	Year Ended
	December 29, 2013			December 30, 2012			December 25, 2011
U.S. federal statutory rate		35.0	%		35.0	%		35.0	%
U.S. state and local taxes, net of federal benefit		(1.5	)		(2.4	)		2.9
Foreign tax rate differential		77.3			(15.1	)		(13.5	)
Tax credits		(34.8	)		(9.3	)		(3.8	)
Foreign withholding taxes		(17.5	)		1.5			(0.1	)
Non-deductible expenses		45.5			28.5			0.2
Change in valuation allowance		(62.4	)		(6.4	)		(13.0	)
Foreign exchange differences		(7.9	)		(22.4	)		—
Deferred Change		7.0			(13.2	)		—
Tax Rate Changes		14.7			—			—

		55.4	%		(3.8	%)		7.7	%

We operate in multiple foreign jurisdictions with lower statutory tax rates than the United States. The reported effective tax rate and income tax provision reflects the shift in the geographical mix of taxable income and losses and relevant statutory rates.

In 2013, a current provision for income taxes was provided for Fairchild Semiconductor Pte. Ltd at the concessionary holiday tax rate of 10% on qualifying income. Fairchild Semiconductor Pte. Ltd is entitled to a concessionary tax rate of 10% through 2019 at which time it will revert to Singapore’s enacted statutory tax rate which is currently 17%.

The tax holidays increased net income by $0.5 million, or less than $0.01 per basic and diluted common share for the year ended December 29, 2013. The tax holidays increased net income by $1.3 million, or $0.01 per basic and diluted common share for the year ended December 30, 2012. The tax holidays increased net income by $3.0 million, or $0.02 per basic and diluted common share for the year ended December 25, 2011.

The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the deferred tax assets and the deferred tax liabilities at December 29, 2013 and December 30, 2012 are presented below:


	December 29, 2013			December 30, 2012
	(In millions)
Deferred tax assets:
Net operating loss carryforwards	$	50.4		$	51.3
Reserves and accruals		37.6			39.0
Tax credit and capital allowance carryovers		88.2			87.4
Plant and equipment		1.4			—
Unrealized loss in other comprehensive income		—			—

Total gross deferred tax assets		177.6			177.7
Valuation allowance		(147.6	)		(154.5	)

Net deferred tax assets		30.0			23.2
Deferred tax liabilities:
Plant and equipment		—			(0.4	)
Unrealized gain in other comprehensive income		(1.7	)		(2.7	)
Capitalized research expenses and intangibles		(6.5	)		(3.1	)

Total deferred tax liabilities		(8.2	)		(6.2	)

Net deferred tax assets (liabilities)	$	21.8		$	17.0

Net deferred tax assets (liabilities) by jurisdiction are as follows:


	December 29,			December 30,
	2013			2012
	(In millions)
U.S.	$	(27.7	)	$	(25.9	)
Europe		1.2			1.1
Japan		0.5			0.5
China		14.1			9.9
Hong Kong		1.9			1.5
Malaysia		—			(1.3	)
Singapore		0.1			0.2
Korea		31.2			30.2
Taiwan		0.5			0.3
Foreign—other		—			0.5

Net deferred tax assets (liabilities)	$	21.8		$	17.0

Deferred tax assets and liabilities are generally classified in the consolidated balance sheet based on the classification of the related asset or liability. The deferred tax valuation allowance for the year ended December 29, 2013 and December 30, 2012 was $147.6 million and $154.5 million, respectively.

Gross carry forwards as of December 29, 2013 for U.S. net operating losses (NOL) totaled $98.9 million, for foreign tax credits totaled $30.5 million, and for research and development credits totaled $21.1 million. The net operating losses expire in 2024 through 2032. The foreign tax credits expire in 2014 through 2024. The research and development credits expire in varying amounts through 2032. As of December 29, 2013, the company has net operating loss carry forwards in Korea of $29.0 million. The Korean net operating losses expire in 2023. .

The company’s ability to utilize its U.S. net operating loss and credit carry forwards may be limited in the future if the company experiences an ownership change, as defined in the Internal Revenue Code. An ownership change occurs when the ownership percentage of 5% or more stockholders changes by more than 50% over a three year period. In August 1999, the company experienced an ownership change as a result of its initial public offering. This ownership change did not result in a material limitation on the utilization of the loss and credit carry forwards. As of December 29, 2013, the company has not undergone a second ownership change.

Significant management judgment is required in determining the company’s provision for income taxes and in determining whether deferred tax assets will be realized. When it is more likely than not that all or some portion of specific deferred tax assets will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not likely to be realizable. Realization is based on the company’s ability to generate sufficient future taxable income. A valuation allowance is determined in accordance with the Income Taxes Topic of the ASC, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In 2005, a full valuation allowance on net U.S. deferred tax assets was recorded. While the results of 2013 represent positive evidence, the company continues to maintain a full valuation allowance on its net U.S. deferred tax assets as the underlying source of income relates to certain intercompany transactions with a non-taxed jurisdiction, which is excluded from determining whether the DTA will be realized. Until such time that some or all of the valuation allowance is reversed, future income tax expense or benefit in the U.S., excluding any tax expense generated by the company’s indefinite life intangibles, will be offset by adjustments to the valuation allowance to effectively eliminate any income tax expense or benefit in the U.S. Income taxes will continue to be recorded for other tax jurisdictions subject to the need for valuation allowances in those jurisdictions.

As of December 29, 2013, the company’s valuation allowance for U.S. deferred tax assets totaled $119.2 million, which consists of the beginning of the year allowance of $123.8 million, a 2013 benefit of $5.6 million to income from operations and a charge of $1.0 million to OCI. The valuation allowance reduces the carrying value of temporary differences generated by capital losses, capitalized research and development expenses, foreign tax credits, reserves and accruals, and NOL carry forwards, which would require sufficient future capital gains and future ordinary income in order to realize the tax benefits. If the company is ultimately able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then the related portion of the valuation allowance will be released to income from continuing operations, additional paid in capital or OCI.

In 2008, a deferred tax asset and full valuation allowance was recorded in the amount of $24.8 million related to the company’s Malaysian cumulative reinvestment allowance and manufacturing incentives. As of December 27, 2009, the valuation allowance was $26.3 million. In 2010, the valuation allowance increased by $3.5 million to $29.8 million. In 2011, the valuation allowance decreased by $2.5 million to $27.3 million. In 2012, the valuation allowance increased by $1.8 million to $29.1 million. In 2013, the valuation allowance decreased by $2.8 million to $26.3 million.

Deferred income taxes have not been provided for the undistributed earnings of the company’s foreign subsidiaries that are reinvested indefinitely. Deferred income taxes have been provided for the undistributed earnings of the company’s foreign subsidiaries that are part of the repatriation plan, which were immaterial at December 29, 2013. In addition, certain non-U.S. earnings, which have been taxed in the U.S. but earned offshore have and will continue to be part of the company’s repatriation plan. At December 29, 2013, the undistributed earnings of the company’s subsidiaries approximated $375.3 million. The amount of taxes attributable to these undistributed earnings is not practicably determinable.

The Income Tax Topic of the ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This statement also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. The company adopted the current standard on January 1, 2007. The unrecognized tax benefits at December 29, 2013 and December 30, 2012 total $58.9 million and $58.6 million respectively. Of the total unrecognized tax benefits at December 29, 2013 and December 30, 2012, $3.3 million and $3.0, respectively would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, as the company has a full valuation allowance against its U.S. deferred taxes. The timing of the expected cash outflow relating to $3.3 million is not reliably determinable at this time.

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


	Year Ended
	December 29, 2013		December 30, 2012		December 25, 2011
Beginning Balance	$	58.6	$	58.4	$	56.5
Increases related to prior year tax positions		0.3		0.2		—
Decreases related to prior year tax positions		—		—		(0.9	)
Increases related to current year tax positions		—		—		2.8
Settlements		—		—		—

Ending Balance	$	58.9	$	58.6	$	58.4

The company’s major tax jurisdictions are the U.S. and Korea. For the U.S., the company has open tax years dating back to 1999 due to the carryforward of tax attributes. In Korea, the company has five open tax years dating back to 2008.

As of December 29, 2013, the company had accrued for penalties and interest relating to uncertain tax positions totaling $0.8 million.

As of December 30, 2012, the company had accrued for penalties and interest relating to uncertain tax positions totaling $0.5 million. The increase of $0.3 million during the year was recognized as a component of income tax expense.