INCOME TAXES

Pre-tax income and the provision for income taxes from continuing operations are summarized as follows (in millions):



	Fiscal Year
	2014		2013		2012
Pre-tax income:
Ireland	(369.3	)	—		—
Other	641.9		607.7		512.0
Total	272.6		607.7		512.0
Provision for income taxes:
Current:
Ireland	2.2		—		—
United States - Federal	44.0		125.0		74.9
United States - State	9.3		10.7		7.5
Other Foreign	49.1		24.3		9.1
Subtotal	104.6		160.1		91.5
Deferred (credit):
Ireland	(24.2	)	—		—
United States - Federal	7.8		16.6		32.6
United States - State	(5.8	)	—		1.4
Other Foreign	(15.1	)	(10.9	)	(6.6	)
Subtotal	(37.3	)	5.7		27.5
Total	67.3		165.8		119.0

A reconciliation of the provision based on the Federal statutory income tax rate to the Company’s effective income tax rate is as follows:



	Fiscal Year
	2014		2013		2012

Provision at statutory rate	12.5	%	35.0	%	35.0	%
Ireland tax on non-trading differences	2.8		—		—
Expenses not deductible for tax purposes/ deductions not expensed for book, net	12.1		(0.6	)	(0.9	)
U.S. Operations:
State income taxes, net of Federal benefit	(0.2	)	1.1		1.1
Foreign tax credit	0.2		(0.1	)	(0.1	)
Research and development credit	(0.5	)	(0.5	)	(0.3	)
Other	(0.8	)	(1.0	)	(0.9	)
Other foreign differences (earnings taxed at other than applicable statutory rate)	(16.0	)	(8.7	)	(9.5	)
Worldwide Operations:
Valuation allowance changes	2.9		—		—
Audit impacts	—		(1.2	)	(5.1	)
Change in unrecognized taxes	15.0		3.3		3.9
Rate change impacts	(3.3	)	—		—
Effective income tax rate	24.7	%	27.3	%	23.2	%

No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $2.3 billion at June 28, 2014, since it is Perrigo’s intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. Due to the number of legal entities and taxing jurisdictions involved and the complexity of the legal entity structure, the complexity of tax laws in the various jurisdictions, including, but not limited to the rules pertaining to the utilization of foreign tax credits in the U.S. and the impact of income projections to calculations, Perrigo believes it is not practicable to estimate, within any reasonable range, the additional income taxes may be payable on the remittance of such undistributed earnings.

Deferred income taxes arise from temporary differences between the financial reporting and the tax reporting basis of assets and liabilities and operating loss and tax credit carry forwards for tax purposes. The components of the net deferred income tax asset (liability) are as follows:



	Fiscal Year
	2014			2013
Deferred income tax asset (liability):
Depreciation and amortization	$	(982.6	)	$	(203.3	)
Inventory basis differences	43.9			35.6
Accrued liabilities	84.3			43.4
Allowance for doubtful accounts	0.9			0.5
Research and development	3.7			4.0
Loss carryforwards	300.4			31.3
Share-based compensation	14.3			13.2
Foreign Tax Credit	10.6			13.7
Federal benefit of unrecognized tax positions	20.7			—
Other, net	59.6			19.6
Subtotal	(444.2		)	(41.9		)
Valuation allowance for loss and credit carryforwards	(198.4		)	(18.8		)
Net deferred income tax (liability) asset:	$	(642.6	)	$	(60.7	)

The above amounts are classified in the consolidated balance sheet as follows (in millions):



	June 28, 2014			June 29, 2013
Assets	$	86.4		$	67.3
Liabilities	(729.0		)	(128.0		)
Net deferred income tax (liability) asset	$	(642.6	)	$	(60.7	)

At June 28, 2014, the Company had gross carryforwards as follows: U.S. state net operating losses of $238.4 million, U.S. state credits of $12.8 million, non U.S. net operating losses of $2.1 billion, U.S. federal net operating losses of $33.9 million, U.S. capital losses of $10.1 million, U.S. credits of $30.2 million and non-U.S. capital losses of $21.2 million. At June 28, 2014, gross valuation allowances had been provided for U.S. state net operating loss carry forwards in the amount of $197.1 million, $8.2 million for U.S. state credit carryforwards, $1.3 billion for non-U.S. net operating loss carryforwards, $16.3 million for U.S. federal net operating loss carryforwards, $10.1 million for U.S. federal capital loss carryforwards, $30.2 million for U.S. federal credit carryforward and $21.2 million for non-U.S. capital loss carryforwards as utilization of such carryforwards within the applicable statutory periods is uncertain. The U.S. federal capital loss carryforward expires through 2017 and the U.S. state net operating loss carryforwards expire through 2034. $17.4 million of the non-U.S. net operating loss carryforwards expire through 2023, while the remaining amount and non-U.S. capital loss carryforwards have no expiration. The valuation allowances for these net operating loss carryforwards are adjusted annually, as necessary. After application of the valuation allowances described above, the Company anticipates no limitations will apply with respect to the realization of its net deferred income tax assets.

The following table summarizes the activity related to amounts recorded for uncertain tax positions, excluding interest and penalties, for the years ended June 28, 2014 and June 29, 2013 (in millions):



	Unrecognized Tax Benefits
Balance at June 30, 2012	$	99.2
Additions:
Positions related to the current year	18.1
Positions related to prior years	1.9
Reductions:
Positions related to the current year	—
Positions related to prior years	—
Settlements with taxing authorities	(7.5		)
Lapse of statutes of limitation	(1.6		)
Balance at June 29, 2013	110.1
Additions:
Positions related to the current year	28.8
Positions related to prior years	22.7
Reductions:
Positions related to the current year	—
Positions related to prior years	—
Settlements with taxing authorities	—
Lapse of statutes of limitation	(1.5		)
Balance at June 28, 2014	$	160.1

The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The total amount accrued for interest and penalties in the liability for uncertain tax positions was $45.3 million and $24.3 million as of June 28, 2014 and June 29, 2013, respectively.

The total liability for uncertain tax positions was $205.4 million and $122.3 million as of June 28, 2014 and June 29, 2013, respectively, after considering the federal tax benefit of certain state and local items, of which $170.2 million and $107.1 million, respectively, would impact the effective tax rate in future periods, if recognized.

The Company files income tax returns in Ireland, the U.S., including various state and local jurisdictions, Israel and numerous other jurisdictions and is therefore subject to audits by tax authorities. Its primary income tax jurisdictions are Ireland, the U.S. and Israel.

Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.

Currently, the IRS is auditing fiscal years 2009 and 2010 and the Israel Tax Authority is auditing fiscal years 2011 and 2012. In regards to the audit for fiscal years 2009 and 2010, we have agreed on certain adjustments and made associated payments of $8.0 million, inclusive of interest. Other issues exist for which the Company disagrees with the positions asserted. Although we have not received a notice of proposed adjustment or a statutory notice related to these positions, if the IRS were to issue a notice of proposed adjustment or a statutory notice in relation these positions, we expect to contest these positions through applicable IRS and judicial procedures, as appropriate.

There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant. At this time, the Company cannot predict the outcome of any audit or related litigation.

Based on the final resolution of tax examinations, judicial or administrative proceedings, changes in facts or law, expirations of statute of limitations in specific jurisdictions or other resolutions of, or changes in, tax positions, it is reasonably possible that unrecognized tax benefits for certain tax positions taken on previously filed tax returns may change materially from those represented on the financial statements as of June 28, 2014. During the next 12 months, it is reasonably possible that such circumstances may occur that would have a material effect on previously unrecognized tax benefits. As a result, the total net amount of unrecognized tax benefits may decrease, which would reduce the provision for taxes on earnings by a range estimated at $2.0 million to $15.0 million.

Tax Rate Changes and Exemptions in Israel

Prior to fiscal 2011, certain of the Company's Israel subsidiaries had been granted Privileged Enterprise status under the Law for the Encouragement of Capital Investments (1959). Income derived from such entities was entitled to various tax benefits beginning in the year the subsidiary first generated taxable income. These benefits applied to an entity depending on certain elections.

These benefits were generally granted with the understanding that cash dividends would not be distributed from the affected income. Should dividends be distributed out of tax exempt income, the subsidiary would be required to pay a 10% to 25% tax on the distribution. The Company does not currently intend to cause distribution of a dividend, which would involve additional tax liability in the foreseeable future; therefore, no provision has been made for such tax on post-acquisition earnings.

In fiscal 2011, Israel enacted new tax legislation that reduced the effective tax rate to 10% for 2011 and 2012, 7% for 2013 and 2014, and 6% thereafter for certain qualifying entities that elect to be taxed under the new legislation. This legislation was rescinded as announced in the Official Gazette on August 5, 2013. The new legislation enacted a 9% rate for certain qualifying entities that elect to be taxed under the new legislation. The Company has two entities that had previously elected the new tax legislation for years after fiscal 2011. For all other entities that do not qualify for this reduced rate, the tax rate has been increased from 25% to 26.5%. These rates were applicable to the Company as of June 30, 2013.

In addition to the above benefits, the Company periodically applies for grants to assist them with development projects. The grants are received from the Office of the Chief Scientist in Israel's Ministry of Industry and Trade. To continue to be eligible for these grants, the Company's development projects must be approved by the Chief Scientist on a case-by-case basis. If the Company's development projects are not approved by the Chief Scientist, the Company will not receive grants to fund these projects, which would increase research and development costs. The receipt of such grants subjects the Company to certain restrictions and pre-approval requirements which may be conditioned by additional royalty payments with rights to transfer intellectual property and/or production abroad. All affected subsidiaries are currently in compliance with these conditions.