Income taxes

The components of income tax expense (“tax provision”) are indicated in the table below. The tax provision for deferred income taxes results from temporary differences arising principally from net operating losses, inventories valuation, receivables valuation, certain accrued amounts and depreciation and amortization, net of any changes to valuation allowances.



	Years Ended
	June 28, 2014			June 29, 2013			June 30, 2012
	(Thousands)
Current:
Federal	$	71,714		$	17,212		$	94,237
State and local	8,038			7,034			19,466
Foreign	91,415			84,965			98,278
Total current taxes	171,167			109,211			211,981
Deferred:
Federal	11,305			2,619			6,896
State and local	3,810			2,390			758
Foreign	(30,759		)	(15,028		)	4,128
Total deferred taxes	(15,644		)	(10,019		)	11,782
Income tax expense	$	155,523		$	99,192		$	223,763

The tax provision is computed based upon income before income taxes from both U.S. and foreign operations. U.S. income before income taxes was $235.4 million, $174.0 million and $320.3 million and foreign income before income taxes was $465.7 million, $375.3 million and $470.4 million in fiscal 2014, 2013 and 2012, respectively.

Reconciliations of the federal statutory tax rate to the effective tax rates are as follows:



	Years Ended
	June 28, 2014		June 29, 2013		June 30, 2012
Federal statutory rate	35.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	1.3		1.1		1.8
Foreign tax rates, net of valuation allowances	(9.3	)	(7.2	)	(5.4	)
Release of valuation allowance, net of U.S. tax expense	(4.8	)	(6.4	)	(2.8	)
Change in contingency reserves	(0.1	)	0.4		0.5
Tax audit settlements	(0.6	)	(6.0	)	(1.0	)
Other, net	0.7		1.2		0.2
Effective tax rate	22.2	%	18.1	%	28.3	%

Foreign tax rates represents the impact of the difference between foreign and federal statutory rates applied to foreign income or loss and also include the impact of valuation allowances established against the Company's otherwise realizable foreign deferred tax assets, which are primarily loss carry-forwards.

Avnet’s effective tax rate on income before income taxes was 22.2% in fiscal 2014 as compared with an effective tax rate of 18.1% in fiscal 2013. Included in the fiscal 2014 effective tax rate is a net tax benefit of $43.8 million, which is comprised primarily of (i) a tax benefit of $33.4 million for the release of valuation allowances against deferred tax assets that were determined to be realizable, primarily related to a legal entity in EMEA (discussed further below), and (ii) a net tax benefit of $7.0 million resulting from losses related to an investment in a foreign subsidiary. The fiscal 2014 effective tax rate is higher than the fiscal 2013 effective tax rate primarily due to a lower amount of tax benefits from audit settlements in fiscal 2014 as compared to fiscal 2013, partially offset by a greater tax benefit from the valuation allowances released in fiscal 2014 as compared with the amount released in fiscal 2013.

The Company applies the guidance in ASC 740, which requires management to use its judgment to the appropriate weighting of all available evidence when assessing the need for the establishment or the release of valuation allowances. As part of this analysis, the Company examines all available evidence on a jurisdiction by jurisdiction basis and weighs the positive and negative evidence when determining the need for full or partial valuation allowances. The evidence considered for each jurisdiction includes, among other items: (i) the historic levels of income or losses over a range of time periods, which may extend beyond the most recent three fiscal years depending upon the historical volatility of income in an individual jurisdiction; (ii) expectations and risk associated with underlying estimates of future taxable income, including considering the historical trend of down-cycles in the semiconductor and related industries; and (iii) prudent and feasible tax planning strategies.

As of the end of fiscal 2014, the Company had a partial valuation allowance against significant net operating loss carry-forward deferred tax assets related to a legal entity in EMEA due to, among several other factors, a history of losses in that entity. In recent fiscal years, such entity has been experiencing improved earnings, which required the partial release of the valuation allowance to the extent the entity has projected future taxable income. In fiscal 2014 and fiscal 2013, the Company determined a portion of the valuation allowance for such legal entity was no longer required due to the expected continuation of improved earnings in the foreseeable future and, as a result, the Company's effective tax rate was reduced upon the partial release of the valuation allowance, net of the U.S. tax expense. In fiscal 2014 and 2013, the valuation allowance released associated with this EMEA legal entity was $33.6 million and $27.1 million, respectively, net of the U.S. tax expense associated with the release. Excluding the benefit in both fiscal years related to the release of the tax valuation allowance associated with such EMEA legal entity, the effective tax rate for fiscal 2014 and fiscal 2013 would have been 27.0% and 23.0%, respectively.

ASC 740 requires a preponderance of positive evidence in order to reach a conclusion to release all or a portion of a valuation allowance when negative evidence exists. The Company will continue to evaluate the need for a valuation allowance against these deferred tax assets and will adjust the valuation allowance as deemed appropriate which, if reduced, could result in a significant decrease to the effective tax rate in the period of the adjustment.

No provision for U.S. income taxes has been made for approximately $2.77 billion of cumulative unremitted earnings of foreign subsidiaries at June 28, 2014 because those earnings are expected to be permanently reinvested outside the U.S. A hypothetical calculation of the deferred tax liability, assuming those earnings were remitted, is not practicable.

The significant components of deferred tax assets and liabilities, included primarily in “other assets” on the consolidated balance sheets, are as follows:



	June 28, 2014			June 29, 2013
	(Thousands)
Deferred tax assets:
Federal, state and foreign tax loss carry-forwards	$	336,334		$	333,940
Inventories valuation	$	18,442		$	19,509
Receivables valuation	26,022			27,185
Various accrued liabilities and other	(1,673		)	33,031
	379,125			413,665
Less — valuation allowance	(182,123		)	(230,821		)
	197,002			182,844
Deferred tax liabilities:
Depreciation and amortization of property, plant and equipment	(46,294		)	(50,469		)
Net deferred tax assets	$	150,708		$	132,375

The change in valuation allowances from fiscal 2013 to fiscal 2014 was primarily due to (i) a net reduction of $52.7 million primarily due to the above mentioned release of a valuation allowance in EMEA, $33.4 million of which impacted the effective tax rate while the remainder was offset in deferred income taxes, and (ii) a net expense of $4.1 million primarily related to rate changes on valuation allowances previously established in various foreign jurisdictions.

As of June 28, 2014, the Company had foreign net operating loss carry-forwards of approximately $1.25 billion, of which $6.2 million will expire during fiscal 2015 and 2016, substantially all of which have full valuation allowances, $278.4 million have expiration dates ranging from fiscal 2017 to 2034 and the remaining $961.3 million have no expiration date. The carrying value of the Company’s foreign net operating loss carry-forwards is dependent upon the Company’s ability to generate sufficient future taxable income in certain foreign tax jurisdictions. In addition, the Company considers historic levels of income or losses, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing a tax valuation allowance.

Estimated liabilities for unrecognized tax benefits are included in “accrued expenses and other” and “other liabilities” on the consolidated balance sheets. These contingent liabilities relate to various tax matters that result from uncertainties in the application of complex income tax regulations in the numerous jurisdictions in which the Company operates. The change in such liabilities during fiscal 2014 is primarily due to favorable audit settlements, which are included in the “reductions for tax positions taken in prior periods” caption in the following table. As of June 28, 2014, unrecognized tax benefits were $128.2 million, of which approximately $112.2 million, if recognized, would favorably impact the effective tax rate and the remaining balance would be substantially offset by valuation allowances. As of June 29, 2013, unrecognized tax benefits were $123.9 million, of which approximately $117.7 million, if recognized, would favorably impact the effective tax rate, and the remaining balance would be substantially offset by valuation allowances. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $25.3 million and $25.0 million, net of applicable state tax benefit, as of the end of fiscal 2014 and 2013, respectively.

Reconciliations of the beginning and ending liability balances for unrecognized tax benefits are as follows:



	June 28, 2014			June 29, 2013
	(Thousands)
Balance at beginning of year	$	123,930		$	146,626
Additions for tax positions taken in prior periods, including interest	15,966			11,732
Reductions for tax positions taken in prior periods, including interest	(880		)	(33,776		)
Additions for tax positions taken in current period	8,364			7,445
Reductions related to settlements with taxing authorities	(14,250		)	(9,064		)
Reductions related to the lapse of applicable statutes of limitations	(7,571		)	(2,812		)
Adjustments related to foreign currency translation	2,662			3,779
Balance at end of year	$	128,221		$	123,930

The evaluation of income tax positions requires management to estimate the ability of the Company to sustain its position and estimate the final benefit to the Company. To the extent that these estimates do not reflect the actual outcome there could be an impact on the consolidated financial statements in the period in which the position is settled, the applicable statutes of limitations expire or new information becomes available as the impact of these events are recognized in the period in which they occur. It is difficult to estimate the period in which the amount of a tax position will change as settlement may include administrative and legal proceedings whose timing the Company cannot control. The effects of settling tax positions with tax authorities and statute expirations may significantly impact the estimate for unrecognized tax benefits. Within the next twelve months, management estimates that approximately $21.5 million of these liabilities for unrecognized tax benefits will be settled by the expiration of the statutes of limitations or through through agreement with the tax authorities for tax positions related to valuation matters and positions related to acquired entities; such matters are common to multinational companies. The expected cash payment related to the settlement of these contingencies is $7.8 million.

The Company conducts business globally and consequently files income tax returns in numerous jurisdictions including those listed in the following table. It is also routinely subject to audit in these and other countries. The Company is no longer subject to audit in its major jurisdictions for periods prior to fiscal year 2008. The years remaining subject to audit, by major jurisdiction, are as follows:



Jurisdiction		Fiscal Year
United States (federal and state)		2012 - 2014
Belgium		2010 - 2014
Germany, Taiwan and United Kingdom		2009 -2014
Netherlands, Singapore and Hong Kong		2008 -2014