10. Income taxes

The components of income tax expense (“tax provision”) are included in the table below. The tax provision for deferred income taxes results from temporary differences arising primarily 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 30, 2018		July 1, 2017		July 2, 2016
	(Thousands)
Current:
Federal	$	255,810	$	(45,351)	$	(16,934)
State and local		(3,174)		4,209		(33)
Foreign		104,156		106,441		92,033
Total current taxes		356,792		65,299		75,066
Deferred:
Federal		(70,172)		(30,025)		5,573
State and local		(10,551)		(3,934)		1,351
Foreign		11,897		15,713		5,114
Total deferred taxes		(68,826)		(18,246)		12,038
Income tax expense	$	287,966	$	47,053	$	87,104

The tax provision is computed based upon income from continuing operations before income taxes from both U.S. and foreign operations. U.S. income (loss) from continuing operations before income taxes was $(385.1) million, $(174.3) million and $(2.7) million, in fiscal 2018, 2017 and 2016, respectively, and foreign income from continuing operations before income taxes was $530.2 million, $484.7 million and $480.7 million in fiscal 2018, 2017 and 2016, respectively.

See further discussion related to income tax expense for discontinued operations in Note 3.

On December 22, 2017 the U.S. federal government enacted tax legislation (the “Act”) which includes provisions to lower the corporate income tax rate from 35% to 21%, impose new taxes on certain foreign earnings, limit deductibility of certain U.S. costs and levy a one-time deemed repatriation tax on accumulated offshore earnings, among other provisions. The law is subject to interpretation and implementation guidance by both federal and state tax authorities, as well as amendments and technical corrections.

As a fiscal year-end taxpayer, certain provisions of the Act began to impact the Company in the second quarter of fiscal 2018, while other provisions will impact the Company beginning in fiscal 2019. The corporate tax rate reduction is effective as of January 1, 2018, resulting in a 2018 federal statutory rate of 28.0% for the Company’s fiscal 2018.

During the third quarter of fiscal 2018, the Company recorded a provisional amount for the one-time mandatory deemed repatriation tax liability (the “transition tax”) of $230.0 million of which $22.0 million is classified as a current income tax liability. The Company will continue to refine the provisional amount under Staff Accounting Bulletin 118 (“SAB 118”) during the measurement period due to substantiation of foreign-based earnings and profits and foreign tax credits and the utilization of those foreign tax credits. Additionally, new guidance from regulators, interpretation of the law, and refinement of the Company’s estimates from ongoing analysis of tax positions may change the provisional amounts recorded. Any changes in the provisional amount recorded will be reflected in income tax expense in the period they are identified, and may be material.

During the second quarter of fiscal year 2018, the Company recorded a provisional amount related to the remeasurement of deferred taxes at the new expected tax rates. In the fourth quarter of fiscal 2018, the Company revised the estimated impact to $6.0 million. This estimate is provisional as the Company continues to analyze the impacts of the Act, including state income tax conformity considerations.

The Company continues to evaluate the impact of the Act including the Company’s historical assertion related to ASC 740 Income Taxes unremitted earnings. The Company has not changed its historical assertion as of June 30, 2018 that its ASC 740 unremitted earnings are permanently reinvested. The Company believes any unrecorded liabilities related to this assertion are not material.

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


	Years Ended
	June 30, 2018		July 1, 2017		July 2, 2016
U.S. federal statutory rate	28.0	%	35.0	%	35.0	%
State and local income taxes, net of federal benefit	(6.1)		(1.7)		0.3
Foreign tax rates, net of valuation allowances	(23.5)		(23.5)		(12.7)
Establishment/(release) of valuation allowance, net of U.S. tax expense	(0.1)		1.3		(1.7)
Change in contingency reserves	(7.4)		3.6		(2.5)
Tax audit settlements	4.5		0.1		(0.7)
Impact of the Act - transition tax	158.5		—		—
Impact of the Act - deferred tax effects	4.2		—		—
Goodwill impairment	35.1		—		—
Other, net	5.3		0.4		0.5
Effective tax rate - continuing operations	198.5	%	15.2	%	18.2	%

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

Avnet’s effective tax rate on income before income taxes from continuing operations was 198.5% in fiscal 2018 as compared with an effective tax rate of 15.2% in fiscal 2017. Included in the fiscal 2018 effective tax rate is a net tax benefit of $34.1 million related to the mix of income in lower tax jurisdictions. The fiscal 2018 effective tax rate is higher than the fiscal 2017 effective tax rate due to the favorable mix of income, offset by tax expense from the transition tax and the goodwill impairment which was not tax deductible.

The Company applies the guidance in ASC 740 Income Taxes, 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 and types 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 Company’s served industries; (iii) jurisdictional specific limitations on the utilization of deferred tax assets including when such assets expire; and (iv) prudent and feasible tax planning strategies.

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


	June 30,		July 1,
	2018		2017
	(Thousands)
Deferred tax assets:
Federal, state and foreign net operating loss carry-forwards	$	296,282	$	269,576
Inventories valuation		26,125		30,330
Receivables valuation		8,332		9,209
Various accrued liabilities and other		39,419		46,922
		370,158		356,037
Less — valuation allowances		(239,483)		(241,687)
		130,675		114,350
Deferred tax liabilities:
Depreciation and amortization of property, plant and equipment		(84,250)		(152,101)
Net deferred tax assets (liabilities)	$	46,425	$	(37,751)

In addition to net deferred tax assets (liabilities), the Company also has $70.1 million and $90.4 million of income tax related deferred charges included as a component of “other assets” in the consolidated balance sheets as of June 30, 2018, and July 1, 2017, respectively.

The change in valuation allowances in fiscal 2018 from fiscal 2017 was primarily due to the expiration of $4.0 million of losses with a related valuation allowance.

As of June 30, 2018, the Company had net operating and capital loss carry-forwards of approximately $1.23 billion, of which $40.0 million will expire during fiscal 2019 and fiscal 2020, substantially all of which have full valuation allowances, $87.2 million have expiration dates ranging from fiscal 2021 to fiscal 2038, and the remaining $1.10 billion have no expiration date. The carrying value of the Company’s net operating and capital 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 and types of income or losses, expectations and risk associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances.

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. As of June 30, 2018, unrecognized tax benefits were $106.6 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $22.2 million and $15.3 million, net of applicable state tax benefits, as of the end of fiscal 2018 and 2017, respectively.

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


	June 30, 2018		July 1, 2017
	(Thousands)
Balance at beginning of year	$	106,786	$	58,830
Additions for tax positions taken in prior periods, including interest		22,362		10,476
Reductions for tax positions taken in prior periods, including interest		(18,753)		(5,656)
Additions for tax positions taken in current period		13,476		13,659
Reductions related to settlements with taxing authorities		(6,674)		(203)
Reductions related to the lapse of applicable statutes of limitations		(14,355)		(5,790)
Adjustments related to foreign currency translation		673		2,772
Activity of discontinued operations		—		10,864
Additions from acquisitions		3,089		21,834
Balance at end of year	$	106,604	$	106,786

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, the Company estimates that approximately $35.8 million of these liabilities for unrecognized tax benefits will be settled by the expiration of the statutes of limitations or through agreement with the tax authorities for tax positions related to valuation matters and positions related to acquired entities. The expected cash payment related to the settlement of these contingencies is approximately $9.9 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 2008. The years remaining subject to audit, by major jurisdiction, are as follows:


Jurisdiction		Fiscal Year
United States (Federal and state)		2014 - 2018
Taiwan		2013 - 2018
Hong Kong		2012 - 2018
Germany		2010 - 2018
Singapore		2008 - 2018
Belgium		2015 - 2018
United Kingdom		2016 - 2018
Canada		2011 - 2018

In connection with the sale of the TS business during fiscal 2017, several legal entities were sold to the Buyer and post-closing tax obligations are the responsibility of the Buyer. Under the terms of the sale agreement, the Company still maintains responsibility for certain pre-closing taxes including any amounts that arise from audits or other judgments received from tax authorities. The Company believes that its current estimates related to tax reserves and unrecognized tax benefits related to the TS business are reasonable, but future changes in facts and circumstances could results in significant changes in estimates that impact tax expense from discontinued operations in the period of change.