INCOME TAXES

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



	Fiscal Year Ended
	June 29, 2013			June 30, 2012			June 25, 2011
Pre-tax income:
U.S.	$	402.2		$	314.2		$	299.3
Foreign	205.5			197.8			151.2
Total	$	607.7		$	512.0		$	450.6
Provision for income taxes:
Current:
Federal	$	125.0		$	74.9		$	108.6
State	10.7			7.5			11.3
Foreign	24.3			9.1			46.2
Subtotal	160.1			91.5			166.1
Deferred (credit):
Federal	16.6			32.6			(11.5		)
State	—			1.4			(1.4		)
Foreign	(10.9		)	(6.6		)	(43.3		)
Subtotal	5.7			27.5			(56.1		)
Total	$	165.8		$	119.0		$	110.0

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 Ended
	June 29, 2013		June 30, 2012		June 25, 2011
	%		%		%
Provision at Federal statutory rate	35.0		35.0		35.0
State income taxes, net of Federal benefit	1.7		1.8		2.2
Foreign tax rate differences	(4.6	)	(6.2	)	(2.5	)
Expenses not deductible for tax purposes/deductions not expensed for book, net	(0.6	)	(0.9	)	(0.9	)
Privileged Enterprise benefit	(4.1	)	(3.3	)	(3.9	)
Settlement with taxing authorities	(1.2	)	(5.1	)	—
Israeli statutory tax rate change	—		—		(1.9	)
Foreign tax credit	(0.1	)	(0.1	)	(6.2	)
Research and development credit	(0.5	)	(0.3	)	(0.7	)
Other	1.7		2.3		3.3
Effective income tax rate	27.3		23.2		24.4

Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries, except for Israel taxes on pre-acquisition Privileged Enterprise earnings, because those earnings are considered permanently reinvested in the operations of those subsidiaries. There is approximately $640.0 million of cumulative foreign earnings and profits for which taxes have not been provided.

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 (in millions):



	Fiscal Year Ended
	June 29, 2013			June 30, 2012
Deferred income tax asset (liability):
Property, equipment and intangibles	$	(203.3	)	$	(78.9	)
Inventory basis differences	35.6			23.8
Accrued liabilities	43.4			30.5
Allowance for doubtful accounts	0.5			0.5
Research and development	4.0			5.3
State operating loss carryforwards	2.7			1.9
State credit carryforwards	0.8			3.6
International operating loss carryforwards	9.1			5.9
International capital loss carryforwards	1.8			2.3
Domestic capital loss carryforwards	4.2			3.7
Domestic operating loss carryforwards	12.7			—
Unearned revenue	4.8			5.1
Share-based compensation	13.2			10.3
Foreign tax credit	13.7			22.7
Other, net	14.8			11.1
Subtotal	(41.9		)	47.7
Valuation allowance for loss and credit carryforwards	(18.8		)	(12.7		)
Net deferred income tax (liability) asset:	$	(60.7	)	$	35.1

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



	June 29, 2013			June 30, 2012
Assets	$	67.3		$	59.2
Liabilities	128.0			24.1
Net deferred income tax (liability) asset	$	(60.7	)	$	35.1

At June 29, 2013, the Company had gross carryforwards as follows: state net operating losses of $108.3 million, state credits of $12.1 million, international net operating losses of $31.2 million, domestic net operating losses of $36.4 million, domestic capital losses of $10.1 million and international capital losses of $19.1 million. At June 29, 2013, gross valuation allowances had been provided for state net operating loss carry forwards in the amount of $67.8 million, $8.1 million for state credit carryforwards, $10.6 million for international net operating loss carryforwards, $21.5 million for domestic net operating loss carryforwards, $10.1 million for domestic capital loss carryforwards and $19.1 million for international capital loss carryforwards as utilization of such carry forwards within the applicable statutory periods is uncertain. The domestic capital loss carryforward expires through 2017 and the state net operating loss carry forwards expire through 2033. $20.8 million of the international net operating loss carryforwards expire through 2022, while the remaining amount and international 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 29, 2013 and June 30, 2012 (in millions):



	Unrecognized Tax Benefits
Balance at June 25, 2011	$	105.0
Additions:
Positions related to the current year	11.9
Positions related to prior years	6.1
Reductions:
Positions related to the current year	—
Positions related to prior years	—
Settlements with taxing authorities	(22.1		)
Lapse of statutes of limitation	(1.7		)
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

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 $24.3 million and $20.0 million as of June 29, 2013 and June 30, 2012, respectively.

The total liability for uncertain tax positions was $122.3 million and $108.5 million as of June 29, 2013 and June 30, 2012, respectively, after considering the federal tax benefit of certain state and local items, of which $107.1 million and $91.9 million, respectively, would impact the effective tax rate in future periods, if recognized.

The Company files income tax returns in the U.S., various state and local jurisdictions, and multiple foreign jurisdictions, and is therefore subject to periodic audits by domestic and foreign tax authorities. Its primary income tax jurisdictions are the U.S. and Israel. The Internal Revenue Service is currently auditing fiscal years 2009 and 2010. The Israeli Tax Authority has notified the Company of audit pertaining to fiscal 2010. There are numerous other income tax jurisdictions for which tax returns are not yet settled, none of which are individually significant.

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 29, 2013. During the next twelve 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 $17.0 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 and 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 are 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.