Note 13—Income Taxes

Income before income taxes for the fiscal years ended June 30, 2015, 2014 and 2013 were as follows:


	Year Ended June 30,
	2015		2014		2013
Domestic income	$	172,348	$	129,653	$	110,136
Foreign income		273,933		177,742		64,134

Income before income taxes	$	446,281	$	307,395	$	174,270

Income tax expense (benefit), net for the fiscal years ended June 30, 2015, 2014 and 2013 consisted of the following:


	Year Ended June 30,
	2015			2014			2013
Current:
Federal	$	17,108		$	13,927		$	6,416
State		2,762			2,703			2,315
Foreign		51,325			24,940			15,415

Current income tax expense, net	$	71,195		$	41,570		$	24,146
Deferred:
Federal		33,940			36,371			23,186
State		(1,107	)		1,581			(11,703	)
Foreign		(759	)		(6,912	)		(3,900	)

Deferred income tax expense, net	$	32,074		$	31,040		$	7,583

Income tax expense, net	$	103,269		$	72,610		$	31,729

Cash paid for Federal, state and foreign income taxes were $31.8 million, $28.0 million and $24.3 million during the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

The tax provisions and analysis of effective income tax rates for the fiscal years ended June 30, 2015, 2014 and 2013 consisted of the following:


	Year Ended June 30,
	2015 ⁽¹⁾			2014 ⁽¹⁾			2013 ⁽¹⁾
Provision for Federal income taxes before credits at statutory rate	$	156,199		$	107,588		$	60,995
State income taxes (benefits)		1,655			4,284			(9,388	)
Difference between Federal statutory rate and foreign effective rate		(34,940	)		(28,610	)		(18,539	)
Foreign exchange (losses) gains		(6,665	)		2,097			821
Foreign income (loss) included in U.S. taxable income		(11,561	)		3,683			1,196
Non-deductible expenses and other taxable permanent differences		9,899			7,214			5,820
Non-taxable income and other deductible permanent differences		(25,130	)		(24,912	)		(9,180	)
Tax benefit from U.S. production activities		(792	)		(3,263	)		(3,879	)
Change in valuation allowance		16,777			(1,263	)		9,520
Change in uncertain tax positions		11,420			9,189			3,195
Difference between Federal and financial tax accounting for equity compensation		(486	)		(794	)		3,033
Federal income credits		(3,958	)		(5,053	)		(9,616	)
Other		(9,149	)		2,450			(2,249	)

Income tax expense, net	$	103,269		$	72,610		$	31,729

⁽¹⁾	The presentation of fiscal year 2013 and 2014 effective rate analysis has been revised to segregate out from the effect of foreign rate category other permanent items and present them in a manner consistent with our domestic disclosure.

Deferred taxes are recorded based upon differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. At June 30, 2015 and 2014, deferred taxes consisted of the following:


	June 30,
Assets/(Liabilities)	2015			2014
Federal and state tax credits	$	51,377		$	90,176
Deferred interest and loss carryforwards		148,258			74,845
Inventory costing differences		15,784			13,935
Capitalized research and development		75,416			91,644
Amortization of share-based compensation		15,485			13,525
Pension liability and other		51,324			46,934
Financial instruments		0			4,688
Reserves and other		81,375			54,507

Deferred tax assets, gross		439,019			390,254
Less valuation allowance		(138,173	)		(65,462	)

Deferred tax assets, net of valuation allowance		300,846			324,792

Fixed assets		(270	)		(2,140	)
Intangible assets		(192,296	)		(51,922	)
Derivatives		(53,874	)		0

Deferred tax liability, gross		(246,440	)		(54,062	)

Net deferred tax asset	$	54,406		$	270,730

The above amounts are classified as current or long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate or, when applicable, based on the expected timing of the reversal. The net current deferred tax assets of $120.2 million and $120.0 million are recorded in Other current assets in the Consolidated Balance Sheets at June 30, 2015 and 2014, respectively. The net current deferred tax liabilities of $49.4 million and $1.0 million are recorded in Other current liabilities in the Consolidated Balance Sheets at June 30, 2015 and 2014, respectively. A net non-current deferred tax liability of $60.1 million and $18.8 million is recorded in Other non-current liabilities in the Consolidated Balance Sheets at June 30, 2015 and 2014, respectively.

The deferred tax assets for the respective periods were assessed for recoverability and, where applicable, a valuation allowance was recorded to reduce the total deferred tax asset to an amount that will, more likely than not, be realized in the future. The net total valuation allowance for the fiscal year ended June 30, 2015 was $138.2 million. At June 30, 2015, the valuation allowance is comprised of $16.0 million recorded against deferred tax assets for foreign deferred interest; $24.8 million recorded against Federal loss carryforwards, $7.3 million recorded against state deferred tax assets and $90.1 million recorded against foreign loss carryforwards. At June 30, 2014, the valuation allowance is comprised of $19.7 million recorded against deferred tax assets for foreign deferred interest; $7.0 million recorded against state deferred tax assets and $38.8 million recorded against foreign loss carryforwards.

During fiscal year 2015 there was a net increase of $72.7 million in the total valuation allowance. The increase is comprised of $67.2 million recorded in Statement of Financial Position primarily related to purchase accounting, $(11.5) million recorded to cumulative translation adjustment within other comprehensive income on the Consolidated Balance Sheet and a non-cash tax charge recorded on the Consolidated Statements of Income of $17.0 million. We have reflected this non-cash tax charge in the tax provision which has decreased net income for fiscal year 2015. If future operating and business conditions were to differ significantly, we would reassess the ability to realize the net deferred tax assets. If it were to become more likely than not that we would not be able to realize the deferred tax assets, then all or a portion of the valuation allowance may need to be re-established, which would result in a charge to tax expense.

In assessing the recoverability of deferred tax assets, we regularly consider whether some portion or all of the deferred tax assets will not be realized based on the recognition threshold and measurement of a tax position. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and, if applicable, the expiration of loss carryforwards and credits in making this assessment.

Although realization is not assured, we have concluded that it is more likely than not that the deferred tax assets for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence including the utilization of taxable temporary differences, projected income from operations and tax planning strategies that could be implemented, if necessary, to prevent a carryforward from expiring. The amount of the net deferred tax assets considered realizable, however, could be reduced in the future if projected income is lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

As of June 30, 2015, the deferred tax assets for tax credit carryforwards are comprised of U.S. foreign tax credits in the amount of $40.2 million with an expiration period between 2016 through 2025; Alternative minimum tax credits of $6.4 million, $3.0 million with an expiration period between 2020 and 2022 and $3.4 million with no expiration; and U.S. Federal and state research and experimentation credits in the amount of $28.8 million and $15.8 million, respectively. The U.S. Federal research and experimentation credits expire between 2028 through 2035. Of the state research and experimentation credits, $5.1 million expire between 2016 through 2030 and $10.7 million have no expiration period.

As of June 30, 2015 deferred interest and loss carryforwards are comprised of foreign deferred interest carryforwards of $133.2 million with no expiration period; foreign net operating loss carryforwards of $11.9 million with an expiration period between 2018 through 2034; foreign net operating loss carryforwards of $318.7 million with no expiration period, and U.S. Federal and state net operating loss carryforwards of $86.6 million with an expiration period of 2016 through 2035.

As of June 30, 2015, we have approximately $1.3 billion of unremitted foreign earnings and other outside basis differences. U.S. deferred taxes have not been provided on all of outside basis differences because they are intended to be permanently reinvested. Such differences would be subject to U.S. taxation if repatriated to the U.S or transferred in a taxable transaction. The determination of the amount of unrecognized deferred tax liability associated with the permanently reinvested outside basis differences are not practicable.

Our operations are subject to ongoing tax examinations in various jurisdictions. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. Accordingly, we have established reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that the positions become uncertain based upon one of the following: (1) the tax position is not more likely than not to be sustained, (2) the tax position is more likely than not to be sustained, but for a lesser amount, or (3) the tax position is more likely than not to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information, (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, regulations, rulings and case law, and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. We adjust these reserves, including an impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit.

Changes in the total amount of gross unrecognized tax benefits, including penalties, are as follows:


	2015			2014
Balance, beginning of year	$	44,209		$	35,206
Increases based on tax positions related to the current year		4,873			2,103
Decreases based on tax positions related to the current year		(817	)		(515	)
Increases identified during the current year related to prior years		10,520			13,182
Decreases identified during the current year related to prior years		(4,130	)		(5,445	)
Decreases related to settlement with taxing authorities		(45	)		0
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		(14	)		(330	)
Increases related to preacquisition positions in purchase accounting		6,040			0
Foreign currency translation		(2,147	)		8

Balance, end of year	$	58,489		$	44,209

The unrecognized tax benefits at June 30, 2015 are permanent in nature and, if recognized, all but $6.0 million would reduce our effective tax rate. We periodically reevaluate the recognition and measurement threshold of our uncertain tax positions based on new or additional evidence such as tax authority administrative pronouncements, rulings and court decisions. The ultimate settlement however, may be materially different from the amount accrued. Our significant jurisdictions are Germany, Brazil, Austria and the U.S. The tax years currently under examination by the German revenue authorities are fiscal years 2005 through 2010. The tax year currently under examination by the Brazilian tax authorities is fiscal year 2008. Austria is not under examination for any tax year. The tax years currently under examination by the United States Internal Revenue Service (“IRS”) are fiscal years 2006 to 2008, 2012 and 2013. We have reached a tentative agreement with the IRS on two issues being audited for fiscal years 2012 and 2013, research and experimentation credits and the domestic production activity deduction. We expect these issues to be settled within 12 months and estimate that unrecognized tax benefits will decrease by $2.8 million and $0.5 million, respectively. We have also received some proposed changes by the German tax authority. Although the final resolution of the proposed adjustments is uncertain, we believe that the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations and cash flows. While we expect the amount of unrecognized tax benefits to change, we are unable to quantify the change at this time.

Of our unrecognized tax benefits, $7.2 million is included in Other non-current liabilities; $4.4 million is included in Income taxes payable; $4.2 million has reduced current deferred taxes included within Other current assets and $42.6 million has reduced our Deferred tax assets, long-term, in our Consolidated Balance Sheet at June 30, 2015. Of the amounts included in our deferred tax assets $39.6 million and $7.2 million would reduce our federal tax credits, and deferred interest and loss carryovers, respectively.

We recognize interest related to unrecognized tax benefits in Income tax expense (benefit) in our Consolidated Statements of Income. As of June 30, 2015, the amount accrued for interest is $4.0 million.