Income Taxes

The components of income before income tax provision for the fiscal years ended June 30, 2017, 2016 and 2015 are as follows (in thousands):



	Years Ended June 30,
	2017		2016		2015
United States	$	82,078	$	97,921	$	108,437
Foreign	9,210		9,483		24,200
Income before income tax provision	$	91,288	$	107,404	$	132,637

The income tax provision for the fiscal years ended June 30, 2017, 2016 and 2015, consists of the following (in thousands):



	Years Ended June 30,
	2017			2016			2015
Current:
Federal	$	26,033		$	29,647		$	33,765
State	695			638			(633		)
Foreign	4,001			10,741			10,953
	30,729			41,026			44,085
Deferred:
Federal	(6,782		)	(5,976		)	(5,492		)
State	353			12			2,406
Foreign	134			261			(917		)
	(6,295		)	(5,703		)	(4,003		)
Income tax provision	$	24,434		$	35,323		$	40,082

The Company’s net deferred tax assets as of June 30, 2017 and 2016 consist of the following (in thousands):



	June 30,
	2017			2016
Inventory valuation	$	15,240		$	12,329
Stock-based compensation	6,277			5,610
Deferred revenue	6,241			6,802
Payables to foreign subsidiaries	3,912			1,824
R&D credit	3,167			10
Accrued vacation and bonus	2,635			2,616
Warranty accrual	1,952			2,213
Foreign exchange unrealized gains and losses	1,884			710
Marketing fund accrual	1,605			1,791
Other	2,836			2,821
Total deferred income tax assets	45,749			36,726
Deferred tax liabilities-depreciation and other	(3,617		)	(3,048		)
Valuation allowance	(3,013		)	—
Deferred income tax assets, net	$	39,119		$	33,678

The Company assesses its deferred tax assets for recoverability on a regular basis, and where applicable, a valuation allowance is recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. As of June 30, 2017, the Company believes that most of its deferred tax assets are “more-likely-than not” to be realized with the exception of California R&D tax credits that have not met the “more-likely than not” realization threshold criteria. Starting from fiscal year 2016 California tax return which was filed in the fourth quarter of fiscal year 2017, on an annual basis and pursuant to current law, the Company generates more California credits than California tax. As a result, at June 30, 2017, the gross excess credits of $4.6 million, or net of federal tax benefit of $3.0 million, are subject to a full valuation allowance. The Company will continue to review its deferred tax assets in accordance with the applicable accounting standards. The net deferred tax assets balance as of June 30, 2017 and 2016 was $39.1 million and $33.7 million, respectively.

The cumulative undistributed earnings of the Company's foreign subsidiaries of $40.6 million at June 30, 2017 are considered to be indefinitely reinvested and accordingly, no provisions for federal and state income taxes have been provided thereon. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings was not practicable. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to various foreign countries.

Subsequent to June 30, 2017, but before the issuance of the consolidated financial statements, the 2017 Tax Act was enacted on December 22, 2017. Some of the significant new requirements of the 2017 Tax Act include, but are not limited to, a one-time mandatory deemed repatriation transition tax on previously deferred foreign earnings which the Company estimates would not have a material impact to the consolidated financial statements in the year of enactment, a re-measurement of our deferred taxes due to the change in the corporate tax rate which the Company is estimating could have a $11.0 million to $15.0 million impact to the consolidated financial statements in the year of enactment, taxation of certain global intangible low-taxed income under the international tax provisions which the Company estimates would not have a material impact to the consolidated financial statements in the year of enactment, and limitations on the deductibility of performance-based compensation for officers which the Company estimates would not have a material impact to the consolidated financial statements in the year of enactment. The tax impacts of the 2017 Tax Act have not been included in the income tax provision for fiscal years ended June 30, 2017, 2016 and 2015. The Company will account for the tax effects of the 2017 Tax Act in the period it was enacted, which is in the fiscal year ended June 30, 2018.

Prior to the enactment of the 2017 Tax Act, the Company considered earnings from foreign operations to be indefinitely reinvested outside of the United States. The Company is currently evaluating whether to change its indefinite reinvestment assertion in light of the 2017 Tax Act and the Company considers that assessment to be incomplete as the financial statements for fiscal year 2018 have not been finalized.

The following is a reconciliation for the fiscal years ended June 30, 2017, 2016 and 2015, of the statutory rate to the Company’s effective federal tax rate:



	Years Ended June 30,
	2017		2016		2015
Tax at statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal tax benefit	4.6		3.2		3.3
Stock-based compensation	2.5		2.3		2.6
Settlement with tax authority	2.0		—		—
Foreign withholding tax	1.1		3.2		3.3
Foreign tax rate differences	0.8		1.2		(2.7	)
Subpart F income inclusion	—		(2.9	)	(3.2	)
Qualified production activity deduction	(3.0	)	(2.8	)	(1.4	)
Uncertain tax positions	(7.6	)	(1.6	)	(0.8	)
Research and development tax credit	(9.4	)	(7.0	)	(3.8	)
Other	0.8		2.3		(2.1	)
Effective tax rate	26.8	%	32.9	%	30.2	%

As of June 30, 2017, the Company had state research and development tax credit carryforwards of $16.6 million. The state research and development tax credits will carryforward indefinitely to offset future state income taxes. $6.7 million of the state research and development tax credit carryforwards were attributable to excess tax deductions from stock option exercises, and were not included in the deferred tax assets shown above. The benefit of these carryforwards will be credited to equity when realized.

The following table summarizes the activity related to the unrecognized tax benefits (in thousands):



	Gross* Unrecognized Income Tax Benefits
Balance at June 30, 2014	$	9,615
Gross increases:
For current year’s tax positions	3,855
For prior years’ tax positions	793
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(971		)
Balance at June 30, 2015	13,292
Gross increases:
For current year’s tax positions	6,167
For prior years’ tax positions	2,074
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(2,138		)
Balance at June 30, 2016	19,395
Gross increases:
For current year’s tax positions	5,732
For prior years’ tax positions	1,119
Gross decreases:
Settlements and releases due to the lapse of statutes of limitations	(7,029		)
Balance at June 30, 2017	$	19,217

________________________

*excludes interest, penalties, federal benefit of state reserves

The total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $15.6 million and $16.7 million as of June 30, 2017 and 2016, respectively.

The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of operations. As of June 30, 2017 and 2016, the Company had accrued $1.0 million and $1.0 million for the payment of interest and penalties relating to unrecognized tax benefits, respectively. During fiscal years 2017, 2016 and 2015, there was no material change in the total amount of the liability for accrued interest and penalties related to the unrecognized tax benefits.

The Company is subject to United States federal income tax as well as income taxes in many state and foreign jurisdictions. In the fourth quarter of fiscal year 2017, the U.S. Internal Revenue Service (“IRS”) completed its examination procedures including all appeals and administrative review for tax years ended June 30, 2013 and 2014 U.S. federal income tax returns. The IRS proposed an adjustment on the Company’s research and development credit claimed which resulted in additional tax liability of $1.9 million. The Company accepted and paid for the amount in June 2017. The impact of this one-time adjustment on the income statement was mostly offset by the recognition of other previously unrecognized tax benefits related to the years audited.

In December 2018, the tax authorities completed their audit in Taiwan for fiscal year 2017, which was related to local income taxes in response to the Taiwan tax authority’s proposed adjustment on the Company’s transfer pricing that resulted in additional tax liability of $1.5 million. The Company accepted and paid the $1.5 million in January 2019. The impact of this one-time adjustment on the income statement was predominantly offset by the recognition of previously unrecognized tax benefits related to the years audited.

The Company believes that it has adequately provided reserves for all uncertain tax positions, however, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provision on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved.

The federal statute of limitations remains open in general for tax years ended June 30, 2016 through 2018. The state statute of limitations remains open in general for tax years ended June 30, 2015 through 2018. The statutes of limitations in major foreign jurisdictions remain open for examination in general for tax years ended June 30, 2013 through 2018. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.