Entity information:
INCOME TAXES
The provision for (benefit from) income taxes on income (loss) from continuing operations before income taxes consists of the following (in thousands):
 
Fiscal
 
2017
 
2016
 
2015
Currently payable:
 
 
 
 
 
Federal
$
5,617

 
$
(3,069
)
 
$
(932
)
State
1,022

 
89

 
108

Foreign
116,022

 
48,039

 
32,189

 
122,661

 
45,059

 
31,365

Deferred and other:
 
 
 
 
 
Federal
1,413

 
(8,131
)
 
(4,327
)
State
(153
)
 
(439
)
 
(200
)
Foreign
(30,510
)
 
(1,095
)
 
(3,679
)
 
(29,250
)
 
(9,665
)
 
(8,206
)
Provision for income taxes
$
93,411

 
$
35,394

 
$
23,159


The components of income (loss) from continuing operations before income taxes consist of (in thousands):
 
Fiscal
 
2017
 
2016
 
2015
United States
$
25,540

 
$
(44,029
)
 
$
(13,293
)
Foreign
276,515

 
166,925

 
112,861

Income from continuing operations before income taxes
$
302,055

 
$
122,896

 
$
99,568


The reconciliation of the income tax expense at the U.S. Federal statutory rate (35.0%) to actual income tax expense is as follows (in thousands):
 
Fiscal
 
2017
 
2016
 
2015
Federal statutory tax expense
$
105,719

 
$
43,015

 
$
34,849

Valuation allowance
4,454

 
1,441

 
635

Foreign taxes at rates less than U.S. rates, net
(12,346
)
 
(5,642
)
 
(10,558
)
Stock-based compensation
3,969

 
2,161

 
2,150

State income taxes, net of federal income tax benefit
398

 
(198
)
 
(38
)
Research and development credit
(7,884
)
 
(4,408
)
 
(2,979
)
Deferred compensation
(1,022
)
 
(428
)
 
(133
)
Release of foreign unrecognized tax benefits
(538
)
 
(4,961
)
 
(39
)
Release of interest accrued for unrecognized tax benefits
(78
)
 
(1,508
)
 
(38
)
Reversal of Competent Authority
—

 
4,328

 
—

Other
739

 
1,594

 
(690
)
Provision for income taxes
$
93,411

 
$
35,394

 
$
23,159

Effective tax rate
30.9
%
 
28.8
%
 
23.3
%

The effective tax rate on income from continuing operations before income taxes for fiscal 2017 of 30.9% was lower than the statutory rate of 35.0%. This was primarily due to differences related to the benefit of income subject to foreign tax rates that are lower than U.S. tax rates including the Singapore tax exemption, the benefit of foreign tax credits and federal research and development tax credits, the benefit of a domestic manufacturing deduction under IRC Section 199 and the release of certain tax reserves due to audit settlement. These amounts are partially offset by Rofin transaction costs not deductible for tax purposes, tax costs of Rofin restructuring, ASC 740-10 (formerly FIN48) tax liabilities for transfer pricing, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under IRC Section 162(m).
In October 2016, Coherent Singapore received an amended Pioneer Status tax exemption from the Singapore authorities effective from fiscal 2012 through fiscal 2021. The tax holiday continues to be conditional upon our meeting certain revenue, business spending and employment thresholds. The impact of this tax exemption decreased Singapore income taxes by approximately $1.1 million and $0.7 million in fiscal 2017 and fiscal 2016, respectively. There is no tax benefit for fiscal 2015 due to the utilization of net operating loss.
The significant components of deferred tax assets and liabilities were (in thousands):
 
Fiscal year-end
 
2017
 
2016
Deferred tax assets:
 
 
 
Reserves and accruals not currently deductible
$
52,803

 
$
34,800

Operating loss carryforwards and tax credits
61,371

 
52,213

Deferred service revenue
2,987

 
2,186

Inventory capitalization
7,116

 
5,001

Stock-based compensation
7,839

 
6,428

Competent authority offset to transfer pricing tax reserves
12,948

 
1,437

Depreciation and amortization
—

 
1,043

Other
4,567

 
5,277

Total gross deferred tax assets
149,631

 
108,385

Valuation allowance
(28,745
)
 
(17,642
)
Total net deferred tax assets
120,886

 
90,743

Deferred tax liabilities:
 
 
 
Gain on issuance of stock by subsidiary
22,378

 
20,781

Depreciation and amortization
60,956

 
—

Accumulated translation adjustment
234

 
4,273

Total gross deferred tax liabilities
83,568

 
25,054

Net deferred tax assets
$
37,318

 
$
65,689


In determining our fiscal 2017 and 2016 tax provisions under ASC Subtopic 740, we calculated the deferred tax assets and liabilities for each separate tax entity. We then considered a number of factors including the positive and negative evidence regarding the realization of our deferred tax assets to determine whether a valuation allowance should be recognized with respect to our deferred tax assets. We determined that a valuation allowance was appropriate for a portion of the deferred tax assets of our California and certain state research and development tax credits, foreign tax attributes and foreign net operating losses at fiscal 2017 and 2016 year-ends.
During fiscal 2017, we increased our valuation allowance on deferred tax assets by $11.1 million to $28.7 million, primarily due to the increase in California and other states research and development tax credits and the release of R&D tax reserves for California and other states, which are not expected to be recognized. The Company had U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. As of September 30, 2017, management determined that there is sufficient positive evidence to conclude that it is more likely than not sufficient taxable income will exist in the future allowing us to recognize these deferred tax assets.
The net deferred tax asset is classified on the consolidated balance sheets as follows (in thousands):
 
Fiscal year-end
 
2017
 
2016
Non-current deferred income tax assets
$
82,691

 
$
67,157

Non-current deferred income tax liabilities
(45,373
)
 
(1,468
)
Net deferred tax assets
$
37,318

 
$
65,689


We have various tax attribute carryforwards which include the following:
•
Foreign gross net operating loss carryforwards are $48.5 million, of which $39.9 million have no expiration date and $8.6 million have various expiration dates beginning in fiscal year 2018. Among the total of $48.5 million foreign net operating loss carryforwards, a valuation allowance of $8.9 million has been provided for certain jurisdictions since the recovery of the carryforwards are uncertain. Federal and certain state gross net operating loss carryforwards are $9.2 million and $30.8 million, respectively, which were acquired from our Rofin-Sinar acquisition. A full valuation allowance against certain other state net operating losses has been recorded. California gross net operating loss carryforward is $0.3 million and is scheduled to expire in fiscal year 2032. The tax benefit relating to approximately $0.3 million of the California net operating loss carryforward is off-balance sheet.
•
Federal R&D credit carryforwards of $30.2 million are scheduled to expire beginning in fiscal year 2024. The tax benefit relating to approximately $4.9 million of the federal tax credit carryforwards is off-balance sheet. California R&D credit carryforwards of $27.2 million have no expiration date. The tax benefit relating to approximately $1.4 million of the state tax credit carryforwards is off-balance sheet with a full valuation allowance. The total of $22.1 million valuation allowance, before federal benefit, has been recorded against California R&D credit carryforwards since the recovery of the carryforwards are uncertain. Other states R&D credit carryforwards of $3.2 million are scheduled to expire beginning in fiscal year 2018. A valuation allowance totaling $2.7 million, before federal benefit, has been recorded against certain state R&D credit carryforwards since the recovery of the carryforwards is uncertain.
•
Federal foreign tax credit carryforwards of $14.9 million are scheduled to expire beginning in fiscal year 2018. The tax benefit relating to approximately $14.9 million of the federal foreign tax credit carryforwards is off-balance sheet.
We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to fiscal 2011 are closed. In September 2017, the Internal Revenue Service (IRS) completed its audit of Coherent Inc.’s fiscal 2013 tax return with no adjustment. The extension of the statutes of limitations for its fiscal 2011 and 2012 tax returns will be closed on June 30, 2018. In our major foreign jurisdictions and our major state jurisdictions, the years prior to fiscal 2011 and 2013, respectively, are closed to examination. Earlier years in our various jurisdictions may remain open for adjustment to the extent that we have tax attribute carryforwards from those years.
In July 2015 and March 2016, Coherent Kaiserslautern GmbH (formerly Lumera Laser GmbH) received tax audit notices for the fiscal years 2010 to 2014. The audit began in August 2015. We acquired the shares of Lumera Laser GmbH in December 2012 and, pursuant to the terms of the acquisition agreement, we should not have responsibility for any assessments related to the pre-acquisition period. In July, 2016, Coherent Holding GmbH and Coherent Deutschland GmbH each received a tax audit notice for the fiscal years 2011 to 2014. The audit began in August 2016. In November 2016, Coherent GmbH, Coherent LaserSystems GmbH & Co. KG and Coherent Germany GmbH received audit notices for the period that they were in existence during the fiscal years 2011 through 2014. The audit work began in January 2017. In the fourth quarter of fiscal 2017, all German tax audits were extended to fiscal 2015 and are currently in progress.
We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions and management believes that it has adequately provided reserves for any adjustments that may result from tax examinations.
A reconciliation of the change in gross unrecognized tax benefits, excluding interest and penalties, is as follows (in thousands):
 
Fiscal year-end
 
2017
 
2016
 
2015
Balance as of the beginning of the year
$
20,442

 
$
22,538

 
$
21,893

Increase related to acquisitions
25,151

 
—

 
—

Tax positions related to current year:
 
 
 
 
 
Additions
1,326

 
2,468

 
311

Reductions
—

 
—

 
—

Tax positions related to prior year:
 
 
 
 
 
Additions
4,951

 
424

 
855

Reductions
(65
)
 
(3,239
)
 
—

Settlements
—

 
(1,655
)
 
—

Lapses in statutes of limitations
(610
)
 
(94
)
 
(521
)
Decrease in unrecognized tax benefits based on audit results
(5,217
)
 
—

 
—

Foreign currency revaluation adjustment
1,588

 
—

 
—

Balance as of end of year
$
47,566

 
$
20,442

 
$
22,538


As of September 30, 2017, the total amount of gross unrecognized tax benefits including gross interest and penalties was $50.4 million, of which $34.7 million, if recognized, would affect our effective tax rate. Our total gross unrecognized tax benefit was classified as a long-term taxes payable in the consolidated balance sheets after reduction by certain deferred tax assets. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of September 30, 2017, the total amount of gross interest and penalties accrued was $2.8 million and it is classified as long-term taxes payable in the consolidated balance sheets. As of October 1, 2016, we had accrued $0.2 million for the gross interest and penalties and it is classified as long-term taxes payable in the consolidated balance sheets.
Management believes that it has adequately provided for any adjustments that may result from tax examinations. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of resolution, settlement and closure of audits is not certain, we do not believe it is reasonably possible that our unrecognized tax benefits will materially change in the next 12 months.
A summary of the fiscal tax years that remain subject to examination, as of September 30, 2017, for our major tax jurisdictions is:
United States—Federal
2011—forward
United States—Various States
2013—forward
Netherlands
2012—forward
Germany
2011—forward
Japan
2011—forward
South Korea
2012—forward
United Kingdom
2016—forward