Income Taxes

The (benefit from) provision for income taxes consisted of the following:



	Fiscal Years Ended
(Dollars in millions)	June 27, 2014			June 28, 2013			June 29, 2012
Current tax expense (benefit):
U.S. Federal	$	(12	)	$	3		$	—
U.S. State	3			10			(2		)
Non-U.S.	62			50			50
Total Current	53			63			48
Deferred tax expense (benefit):
U.S. Federal	(43		)	(49		)	(30		)
U.S. State	2			(1		)	2
Non-U.S.	(26		)	(20		)	—
Total Deferred	(67		)	(70		)	(28		)
(Benefit from) provision for income taxes	$	(14	)	$	(7	)	$	20

Income before income taxes consisted of the following:



	Fiscal Years Ended
(Dollars in millions)	June 27, 2014		June 28, 2013		June 29, 2012
U.S.	$	149	$	175	$	137
Non-U.S	1,407		1,656		2,745
	$	1,556	$	1,831	$	2,882

The Company recorded $0.3 million, $1 million and $6 million of excess tax benefits associated with stock option deductions in fiscal years 2014, 2013 and 2012, respectively.

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 purposes. The significant components of the Company's deferred tax assets and liabilities were as follows:



	Fiscal Years Ended
(Dollars in millions)	June 27, 2014			June 28, 2013
Deferred tax assets
Accrued warranty	$	99		$	112
Inventory valuation accounts	49			55
Receivable allowance	15			13
Accrued compensation and benefits	103			107
Depreciation	140			125
Restructuring accruals	4			5
Other accruals and deferred items	39			44
Net operating losses and tax credit carry-forwards	1,081			1,103
Other assets	8			6
Total deferred tax assets	1,538			1,570
Valuation allowance	(888		)	(989		)
Net deferred tax assets	650			581
Deferred tax liabilities
Unremitted earnings of certain non-U.S. entities	(14		)	(14		)
Acquisition-related items (DTL)	(19		)	(9		)
Other liabilities	(2		)	(4		)
Total deferred tax liabilities	(35		)	(27		)
Total deferred tax assets	$	615		$	554

As Reported on the Balance Sheet
Current assets—deferred income taxes	$	126		$	115
Non-current assets—deferred income taxes	499			456
Current liabilities—Accrued expenses	—			(2		)
Other non-current liabilities	(10		)	(15		)
Total deferred income taxes	$	615		$	554

The deferred tax asset valuation allowance decreased by approximately $101 million, $75 million and $82 million, in fiscal years 2014, 2013 and 2012, respectively. The valuation allowance decrease in fiscal year 2014 was primarily due to incremental future taxable income that resulted from acquisition activity.

At June 27, 2014, the Company recorded $615 million of net deferred tax assets. The realization of these deferred tax assets is primarily dependent on the Company's ability to generate sufficient U.S. and certain non-U.S. taxable income in future periods. Although realization is not assured, the Company's management believes that it is more likely than not that these deferred tax assets will be realized. The amount of deferred tax assets considered realizable, however, may increase or decrease in subsequent periods when the Company reevaluates the underlying basis for its estimates of future U.S. and certain non-U.S. taxable income.

At June 27, 2014, the Company had U.S. federal, state and non-U.S. tax net operating loss carryforwards of approximately $2.9 billion, $1.8 billion and $112 million, respectively, which will expire at various dates beginning in fiscal year 2016, if not utilized. At June 27, 2014, the Company had U.S. federal and state tax credit carryforwards of $348 million and $81 million, respectively, which will expire at various dates beginning in fiscal year 2016 if not utilized.

As of June 27, 2014, the use of approximately $376 million and $90 million of the Company's total U.S. net operating loss and tax credit carryforwards, respectively, is subject to an aggregate annual limitation of $46 million pursuant to U.S. tax law.

For purposes of the tax reconciliation between the provision for income taxes at the statutory rate and the effective tax rate, the Irish statutory rate of 25% was applied as follows:



	Fiscal Years Ended
(Dollars in millions)	June 27, 2014			June 28, 2013			June 29, 2012
Provision (benefit) at statutory rate	$	389		$	458		$	720
Net U.S. state income tax provision	3			12			(2		)
Permanent differences	3			3			1
Valuation allowance	(100		)	(97		)	(70		)
Non-U.S. losses with no tax benefits	8			27			1
Non-U.S. earnings taxed at less than statutory rate	(313		)	(414		)	(645		)
Other individually immaterial items	(4		)	4			15
(Benefit from) provision for income taxes	$	(14	)	$	(7	)	$	20

A substantial portion of the Company's operations in Malaysia, Singapore, and Thailand operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2020. Certain of the tax holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs was to increase the Company's net income by approximately $289 million in fiscal year 2014 ($0.83 per share, diluted), to increase the Company's net income by approximately $338 million in fiscal year 2013 ($0.89 per share, diluted), and to increase the Company's net income by $504 million in fiscal year 2012 ($1.14 per share, diluted).

Since establishing Irish tax residency in fiscal year 2010, the Company consists of an Irish tax resident parent holding company with various U.S. and non-U.S. subsidiaries that operate in multiple non-Irish taxing jurisdictions. The amount of temporary differences (including undistributed earnings) related to outside basis differences in the stock of non-Irish resident subsidiaries considered indefinitely reinvested outside of Ireland for which Irish income taxes have not been provided as of June 27, 2014 was approximately $2.8 billion. If such amount were remitted to Ireland as a dividend, it is likely that tax at 25% or approximately $700 million would result.

As of June 27, 2014 and June 28, 2013, the Company had approximately $115 million and $157 million, respectively, of unrecognized tax benefits excluding interest and penalties. The amount of unrecognized tax benefits, if recognized, that would impact the effective tax rate is $115 million and $157 million as of June 27, 2014 and June 28, 2013, respectively, subject to certain future valuation allowance reversals.

The following table summarizes the activity related to the Company's gross unrecognized tax benefits:



	Fiscal Years Ended
(Dollars in millions)	June 27, 2014			June 28, 2013			June 29, 2012
Balance of unrecognized tax benefits at the beginning of the year	$	157		$	135		$	128
Gross increase for tax positions of prior years	10			14			1
Gross decrease for tax positions of prior years	(64		)	(4		)	(3		)
Gross increase for tax positions of current year	13			16			13
Gross decrease for tax positions of current year	—			—			—
Settlements	—			—			—
Lapse of statutes of limitation	(3		)	(5		)	(3		)
Non-U.S. exchange (gain)/loss	2			1			(1		)
Balance of unrecognized tax benefits at the end of the year	$	115		$	157		$	135

It is the Company's policy to include interest and penalties related to unrecognized tax benefits in the provision for taxes on the Consolidated Statements of Operations. During fiscal year 2014, the Company recognized net tax expense for interest and penalties of $8 million as compared to net tax expense for interest and penalties of $2 million during each fiscal year 2013 and fiscal year 2012. As of June 27, 2014, the Company had $27 million of accrued interest and penalties related to unrecognized tax benefits compared to $19 million in fiscal year 2013.

During the 12 months beginning June 28, 2014, the Company expects that its unrecognized tax benefits could be reduced anywhere from $3 million to $50 million as a result of audit settlements and the expiration of certain statutes of limitation.

The Company is subject to taxation in many jurisdictions globally and is required to file U.S. federal, U.S. state and non-U.S. income tax returns. In June, 2014, the Company received the Revenue Agent’s Report and Notices of Proposed Adjustments for its U.S. federal income tax returns for fiscal years 2008, 2009 and 2010. The Company’s China subsidiaries are under examination by the Chinese tax administration for years 2004 through 2012. These examinations may result in proposed adjustments to the income taxes as filed during these periods. The Company believes that it has adequately provided for these matters, but there is a reasonable possibility that an adverse outcome of these examinations could have a material effect on the Company’s financial results. In this case, the Company would consider pursuing all possible remedies available, including appeals, judicial review and competent authority.

The Company is no longer subject to tax examination of U.S. federal income tax returns for years prior to fiscal year 2008. With respect to U.S. state and non-U.S. income tax returns, the Company is generally no longer subject to tax examination for years ending prior to fiscal year 2004. The Company believes it has provided adequately for all reasonable outcomes.