Note 13—Income Taxes

Income before income taxes for the fiscal years ended June 30, 2016, 2015 and 2014 were as follows:

	Year Ended June 30,
	2016		2015		2014
Domestic income	$	285,252	$	172,348	$	129,653
Foreign income		245,256		273,933		177,742
Income before income taxes	$	530,508	$	446,281	$	307,395

Income tax expense (benefit), net for the fiscal years ended June 30, 2016, 2015 and 2014 consisted of the following:

	Year Ended June 30,
	2016			2015			2014
Current:
Federal	$	82,445		$	17,108		$	13,927
State		4,450			2,762			2,703
Foreign		64,696			51,325			24,940
Current income tax expense, net	$	151,591		$	71,195		$	41,570
Deferred:
Federal		37,772			33,940			36,371
State		(75	)		(1,107	)		1,581
Foreign		(21,231	)		(759	)		(6,912	)
Deferred income tax expense, net	$	16,466		$	32,074		$	31,040
Income tax expense, net	$	168,057		$	103,269		$	72,610

Cash paid for Federal, state and foreign income taxes were $98.1 million, $31.8 million and $28.0 million during the fiscal years ended June 30, 2016, 2015 and 2014, respectively.

The tax provisions and analysis of effective income tax rates for the fiscal years ended June 30, 2016, 2015 and 2014 consisted of the following:

	Year Ended June 30,
	2016			2015			2014 ⁽¹⁾
Provision for Federal income taxes before credits at statutory rate	$	185,678		$	156,199		$	107,588
State income taxes		4,376			1,655			4,284
Difference between Federal statutory rate and foreign effective rate		(33,420	)		(34,940	)		(28,610	)
Foreign exchange (losses) gains		(61	)		(6,665	)		2,097
Foreign income (loss) included in U.S. taxable income		25,409			(11,561	)		3,683
Non-deductible expenses and other taxable permanent differences		10,085			9,899			7,214
Non-taxable income and other deductible permanent differences		(20,570	)		(25,130	)		(24,912	)
Tax benefit from U.S. production activities		(832	)		(792	)		(3,263	)
Change in valuation allowance		(398	)		16,777			(1,263	)
Change in uncertain tax positions		5,003			11,420			9,189
Difference between Federal and financial tax accounting for equity compensation		2,310			(486	)		(794	)
Federal income credits		(15,448	)		(3,958	)		(5,053	)
Other		5,925			(9,149	)		2,450
Income tax expense, net	$	168,057		$	103,269		$	72,610

⁽¹⁾	The presentation of fiscal year 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, 2016 and 2015, deferred taxes consisted of the following:

	June 30,
Assets/(Liabilities)	2016			2015
Federal and state tax credits	$	22,140		$	51,377
Deferred interest and loss carryforwards		152,579			148,258
Inventory costing differences		16,488			15,784
Capitalized research and development		73,025			75,416
Amortization of share-based compensation		21,610			15,485
Pension liability and other		58,748			51,324
Fixed assets		3,612			-
Reserves and other		69,501			81,375
Deferred tax assets, gross		417,703			439,019
Less valuation allowance		(130,863	)		(138,173	)
Deferred tax assets, net of valuation allowance		286,840			300,846
Fixed assets		-			(270	)
Intangible assets		(143,370	)		(192,296	)
Derivatives		(35,415	)		(53,874	)
Deferred tax liability, gross		(178,785	)		(246,440	)
Net deferred tax asset	$	108,055		$	54,406

The above amounts are classified as long-term in the Consolidated Balance Sheets in accordance with the asset or liability to which they relate. A net non-current deferred tax liability of $32.1 million and $45.6 million is recorded in Other non-current liabilities in the Consolidated Balance Sheets at June 30, 2016 and 2015, 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, 2016 was $130.9 million. At June 30, 2016, the valuation allowance is comprised of $16.0 million recorded against deferred tax assets for foreign deferred interest; $8.1 million recorded against state deferred tax assets and $103.8 million recorded against foreign loss and credit carryforwards and $3.0 million recorded against other foreign deferred tax assets. 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 against state deferred tax assets and $90.1 million recorded against foreign loss carryforwards.

During fiscal year ended June 30, 2016 there was a net decrease of $7.3 million in the total valuation allowance. The decrease is comprised of $6.2 million primarily related to purchase accounting and $0.4 million related to a cumulative translation adjustment within other comprehensive income and are recorded in the Consolidated Balance Sheets, respectively, and a $0.7 million benefit non-cash tax charge recorded in the Consolidated Statements of Income. We have reflected this non-cash tax benefit in the tax provision which has increased net income for the fiscal year ended June 30, 2016. If future operating and business conditions were to differ significantly, we would reassess our 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 income 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, 2016, the deferred tax assets for tax credit carryforwards are comprised of alternative minimum tax credits of $7.3 million, $3.9 million with an expiration period between 2020 and 2023 and $3.4 million with no expiration; and U.S. Federal and state research and experimentation credits in the amount of $7.8 million and $24.5 million, respectively. The U.S. Federal research and experimentation credits expire between 2030 through 2036. Of the state research and experimentation credits, $8.2 million expire between 2017 through 2031 and $16.3 million have no expiration period.

As of June 30, 2016 deferred interest and loss carryforwards are comprised of foreign deferred interest carryforwards of $178.1 million with no expiration period; foreign net operating loss carryforwards of $22.0 million with an expiration period between 2016 through 2025; foreign net operating loss carryforwards of $346.2 million with no expiration period, and U.S. Federal and state net operating loss carryforwards of $34.3 million with an expiration period of 2022 through 2034.

As of June 30, 2016, we have approximately $1.6 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:

	2016			2015
Balance, beginning of year	$	58,489		$	44,209
Increases based on tax positions related to the current year		1,510			4,873
Decreases based on tax positions related to the current year		-			(817	)
Increases identified during the current year related to prior years		9,410			10,520
Decreases identified during the current year related to prior years		(1,194	)		(4,130	)
Decreases related to settlement with taxing authorities		(3,329	)		(45	)
Reductions to unrecognized benefits as a result of a lapse of the applicable statute of limitations		-			(14	)
Increases related to preacquisition positions in purchase accounting		-			6,040
Foreign currency translation		381			(2,147	)
Balance, end of year	$	65,267		$	58,489

The unrecognized tax benefits at June 30, 2016 are permanent in nature and, if recognized, 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 examination by the German revenue authorities for fiscal years 2005 through 2010 was recently closed, with one issue remaining in dispute; we have filed a formal appeal for this issue and will proceed to the fiscal authority and court. The tax year currently under examination by the Brazilian tax authorities is fiscal year 2010. 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 and 2012 to 2015 for Harman International Industries, Inc. and fiscal years 2010 to 2012 for Symphony Teleca Corporation. Fiscal years 2006 to 2008 and 2012 to 2013 for Harman International Industries, Inc. are currently in the appeals process and are awaiting resolution.

During fiscal year 2016, an outstanding transfer pricing issue from fiscal year 2006 was settled through a mutual agreement procedure among the U.S. and Germany. The Harman International Industries, Inc. audit for fiscal years 2015 and 2014 are underway and we do not expect the audit to be closed for at least 18 months. The Symphony Teleca Corporation audit for fiscal years 2010 to 2012 resulted in the IRS issuing a 30 day letter and the Company filing a protest letter in June 2016. 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 Balance Sheets, Consolidated Statements of Income or our Consolidated Statements of Cash Flow. 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, $48.2 million is included in Other non-current liabilities in our Consolidated Balance Sheets, $0.2 million has reduced Other current assets in our Consolidated Balance Sheet and $16.9 million has reduced our Deferred tax assets, net, in our Consolidated Balance Sheet at June 30, 2016. Of the amounts included in our deferred tax assets, net, $9.2 million and $7.7 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, net in our Consolidated Statements of Income. As of June 30, 2016, the amount accrued and recorded in our Consolidated Balance Sheet for interest is $2.9 million.