INCOME TAXES

Pretax income (loss) is as follows:



	For the Year Ended
	June 25, 2016			June 27, 2015		June 28, 2014
	(in thousands)
Domestic pre-tax income (loss)	$	(48,985	)	$	68,289	$	87,630
Foreign pre-tax income (loss)	334,039			177,881		321,596
Total	$	285,054		$	246,170	$	409,226

The provision for income taxes consisted of the following:



	For the Year Ended
	June 25, 2016			June 27, 2015			June 28, 2014
	(in thousands)
Federal
Current	$	98,810		$	108,736		$	93,012
Deferred	(52,240		)	(74,190		)	(42,875		)
State
Current	1,808			3,791			2,676
Deferred	(2,406		)	(3,269		)	(1,465		)
Foreign
Current	10,278			8,294			6,692
Deferred	1,329			(3,230		)	(3,624		)
Total provision for income taxes	$	57,579		$	40,132		$	54,416

As of June 25, 2016, the Company's foreign subsidiaries have accumulated undistributed earnings of approximately $907.5 million that are intended to be indefinitely reinvested outside the U.S. and, accordingly, no provision for U.S. federal and state tax has been made for the distribution of these earnings. At June 25, 2016 the amount of the unrecognized deferred tax liability on the indefinitely reinvested earnings was $290.0 million.

A reconciliation of the Company's Federal statutory tax rate to the Company's effective tax rate is as follows:



	For the Year Ended
	June 25, 2016		June 27, 2015		June 28, 2014

Federal statutory rate	35.0	%	35.0	%	35.0	%
State tax, net of federal benefit	(0.6	)	(0.4	)	0.1
General business credits	(2.8	)	(2.8	)	(0.9	)
Effect of foreign operations	(21.7	)	(24.6	)	(19.1	)
Stock-based compensation	4.7		5.9		3.9
Fixed assets federal tax basis adjustments	—		—		(8.4	)
Interest accrual for unrecognized tax benefits	3.2		2.6		1.1
Non-deductible goodwill	2.5		—		—
Other	(0.1	)	0.6		1.6
Effective tax rate	20.2	%	16.3	%	13.3	%

The income tax rate benefit of 8.4% in the fiscal year ended June 28, 2014 for fixed assets federal tax basis adjustments is a one-time benefit for fixed assets tax basis adjustments generated by prior year depreciation expense that did not provide a tax benefit in prior years.

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 components of the Company's deferred tax assets and liabilities are as follows:



	For the Year Ended
	June 25, 2016			June 27, 2015
	(in thousands)
Deferred tax assets:
Distributor related accruals and sales return and allowance accruals	$	23,482		$	15,966
Accrued compensation	39,979			44,961
Stock-based compensation	15,562			22,639
Net operating loss carryovers	44,962			47,305
Tax credit carryovers	57,101			54,501
Other reserves and accruals not currently deductible for tax purposes	36,516			29,420
Other	11,552			10,968
Total deferred tax assets	229,154			225,760

Deferred tax liabilities:
Fixed assets and intangible assets cost recovery, net	(82,504		)	(141,070		)
Unremitted earnings of foreign subsidiaries	(11,842		)	—
Other	(3,695		)	(5,349		)
Total deferred tax liabilities	(98,041		)	(146,419		)

Net deferred tax assets /(liabilities) before valuation allowance	131,113			79,341
Valuation allowance	(95,060		)	(91,175		)
Net deferred tax assets/(liabilities)	$	36,053		$	(11,834	)

The valuation allowance as of June 25, 2016 and June 27, 2015 primarily relates to certain state and foreign net operating loss carryforwards and certain state tax credit carryforwards. The valuation allowance increased by $3.9 million in fiscal year 2016. The increase was primarily due to valuation allowances that were established for net operating loss and credit carryforwards generated during the fiscal year 2016. Approximately $37.3 million of the valuation allowance, as of June 25, 2016, is attributable to the tax benefits of income tax deductions generated by the exercise of stock options that, when realized, will be recorded as a credit to additional paid-in-capital.

As of June 25, 2016, the Company has $24.2 million of federal net operating loss carryforwards expiring at various dates between fiscal years 2021 and 2033, $81.0 million of state net operating loss carryforwards expiring at various dates through the fiscal year 2033, $126.2 million of foreign net operating losses with no expiration date, $7.0 million of state tax credit carryforwards expiring at various dates between fiscal years 2017 and 2031, and $95.2 million of state tax credit carryforwards with no expiration date.

The Company classifies unrecognized tax benefits as (i) a current liability to the extent that payment is anticipated within one year; (ii) a non-current liability to the extent that payment is not anticipated within one year; or (iii) as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets such as operating loss or tax credit carryforwards or to the extent that operating loss or tax credit carryforwards would be able to offset the additional tax liability generated by unrecognized tax benefits.

A reconciliation of the change in gross unrecognized tax benefits, excluding interest, penalties and the federal benefit for state unrecognized tax benefits, is as follows:



	For the Year Ended
	June 25, 2016			June 27, 2015			June 28, 2014
	(in thousands)
Balance as of beginning of year	$	427,629		$	396,765		$	302,904
Tax positions related to current year:
Addition	53,899			55,343			58,035
Tax positions related to prior year:
Addition	3,035			214			300
Current year acquisitions	—			—			39,566
Reduction	(205		)	(2,433		)	(586		)
Settlements	(943		)	(21,458		)	(496		)
Lapses in statutes of limitations	(670		)	(802		)	(2,958		)
Balance as of end of year	$	482,745		$	427,629		$	396,765

The total amount of gross unrecognized tax benefits as of June 25, 2016 that, if recognized, would affect the effective tax rate and additional paid in capital is $469.5 million and $13.2 million, respectively.

Consistent with prior years, the Company reports interest and penalties related to unrecognized tax benefits as a component of income tax expense. The gross amount of interest and penalties recognized in income tax expense during the fiscal years ended June 25, 2016, June 27, 2015, and June 28, 2014 was $14.7 million, $6.5 million and $6.6 million, respectively, and the total amount of interest and penalties accrued as of June 25, 2016, June 27, 2015, and June 28, 2014 was $49.0 million, $34.4 million, and $27.9 million, respectively.

The Company does not expect its unrecognized tax benefits to change significantly within the next 12 months.

During the fiscal year ended June 27, 2015, $21.2 million of unrecognized tax benefits were recognized due the favorable settlement of a Singapore tax issue and $3.6 million of related interest and penalty accruals were reversed.

The Company’s federal corporate income tax returns are audited on a recurring basis by the Internal Revenue Service (“IRS”). The IRS has concluded its field examination of the Company’s federal corporate income tax returns for fiscal years 2009 through 2011(“Audit Years”) and issued a Notice of Proposed Adjustment (“NOPA”) for transfer pricing issues related to cost sharing and buy-in license payments for the use of intangible property by one of the Company’s international subsidiaries. After the end of the fiscal year 2016 the Company received an IRS Revenue Agent’s Report (“RAR”) for the Audit Years that includes these proposed transfer pricing adjustments and penalties. The Company disagrees with these adjustments and will file a protest with the Appeals Office of the IRS in fiscal year 2017 to challenge the proposed transfer pricing adjustments and penalties. The Company believes that its reserves for unrecognized tax benefits are sufficient to cover any potential assessments that may result from the final resolution of these transfer pricing issues.

A summary of the fiscal tax years that remain subject to examination, as of June 25, 2016, for the Company's major tax jurisdictions are as follows:



United States - Federal	2009	-	Forward
United States - Various States	2009	-	Forward
Ireland	2011	-	Forward
Japan	2010	-	Forward
Philippines	2013	-	Forward
Singapore	2012	-	Forward
United Kingdom	2013	-	Forward