Income Taxes

The Company’s effective tax rate differs from the statutory federal income tax rate of 35% due primarily to regional mix of income and certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside of the U.S.

The Company uses a two-step approach to recognize and measure uncertain tax positions (“UTP”). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amount of net unrecognized tax benefits is as follows:



(in thousands)
Balance at January 25, 2015	7,774
Additions based on tax positions related to the current year	92
Reductions for tax positions of prior years, net	(252	)
Reductions for settlements with tax authorities	(139	)
Balance as of July 26, 2015	7,475

The gross unrecognized tax benefit (before federal impact of state items) was $9.6 million and $9.9 million at July 26, 2015 and January 25, 2015, respectively. Included in the balance of unrecognized tax benefits at July 26, 2015 and January 25, 2015, is $7.5 million and $7.8 million of net tax benefit (after federal impact of state items), respectively, that, if recognized, would impact the effective tax rate, subject to the valuation allowance.

The liability for UTP is reflected within the consolidated balance sheets as follows:



(in thousands)	July 26, 2015		January 25, 2015
Deferred tax assets - non-current	$	7,475	$	7,522
Other long-term liabilities	—		252
Total accrued taxes	$	7,475	$	7,774

The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated statements of income. The Company had approximately $293,000 of net interest and penalties accrued at July 26, 2015 and January 25, 2015.

Tax years prior to 2012 (the Company’s fiscal year 2013) are generally not subject to examination by the Internal Revenue Service (“IRS”) except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. The Company is currently under IRS audit for fiscal year 2013 and expects to close those audits within the next twelve months. The Company’s positions are expected to be sufficient to address matters that may arise under examination. For state returns, the Company is generally not subject to income tax examinations for years prior to 2010 (the Company’s fiscal year 2011). The Company has a significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2013. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates.