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.

 

The tax provision is computed based upon income before income taxes from continuing operations from both U.S. and foreign operations. U.S. (loss) income before income taxes from continuing operations was $(174.3) million, $(2.7) million and $85.8 million, in fiscal 2017, 2016 and 2015, respectively, and foreign income before income taxes from continuing operations was $484.7 million, $480.7 million and $485.7 million in fiscal 2017, 2016 and 2015, respectively.

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

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

 

Foreign tax rates represents the impact of the difference between foreign 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 15.2% in fiscal 2017 as compared with an effective tax rate of 18.2% in fiscal 2016. Included in the fiscal 2017 effective tax rate is a net tax benefit of $73 million related to the mix of income in lower tax jurisdictions. The fiscal 2017 effective tax rate is lower than the fiscal 2016 effective tax rate due to the aforementioned favorable mix of income, partially offset by tax expense from the establishment of valuation allowances and reserves in fiscal 2017 as compared with the tax benefit from the valuation allowances released in fiscal 2016.

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.

As of the end of fiscal 2015, the Company released the remaining valuation allowance against significant net deferred tax assets related to a legal entity in EMEA. Due to the profitability for this entity and the projections for the future, management concluded a full release of the valuation allowance was appropriate in fiscal 2015.

No provision for U.S. income taxes has been made for approximately $3.33 billion of cumulative unremitted earnings of foreign subsidiaries at July 1, 2017, 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. Foreign cash balances are generally used for ongoing working capital and capital expenditure needs and to support acquisitions, and are permanently reinvested outside the United States. If these funds were needed for general corporate use in the United States, the Company may incur significant income taxes.

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

 

In addition to net deferred tax liabilities, the Company also has $90.4 million and $98.2 million of income tax related deferred charges included as a component of “other assets” in the consolidated balance sheets as of July 1, 2017, and July 2, 2016, respectively that are the result of a fiscal 2016 business restructuring in EMEA. 

The change in valuation allowances in fiscal 2017 from fiscal 2016 was primarily due to a net increase of $173.5 million as a result of the acquisition of PF and other tax attributes recorded for which the Company does not expect to realize a benefit.

As of July 1, 2017, the Company had foreign net operating and capital loss carry-forwards of approximately $1.07 billion, of which $17.3 million will expire during fiscal 2018 and 2019, substantially all of which have full valuation allowances, $61.2 million have expiration dates ranging from fiscal 2020 to 2037, and the remaining $986.3 million have no expiration date. The carrying value of the Company’s foreign 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. The change in such liabilities during fiscal 2017 was primarily due to the acquisition of PF and recognition of newly identified unrecognized tax benefits as presented in the following table. As of July 1, 2017, unrecognized tax benefits were $106.8 million. The estimated liability for unrecognized tax benefits included accrued interest expense and penalties of $15.3 million and $13.9 million, net of applicable state tax benefits, as of the end of fiscal 2017 and 2016, respectively.

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

 

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 $23.5 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 $8.4 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:

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.