FABRINET

3.	Income taxes

Cayman Islands

Fabrinet is domiciled in the Cayman Islands. Under the current laws of the Cayman Islands, Fabrinet is not subject to tax in the Cayman Islands on income or capital gains. Fabrinet has received this undertaking for a 20-year period ending August 24, 2019, and after the expiration date, Fabrinet can make a request for renewal with the office of the Clerk of the Cabinet for another 20 years.

Income of the Company exempted from corporate income tax in the Cayman Islands amounted to $64.2 million, $41.0 million and $27.0 million in the years ended June 30, 2017, June 24, 2016 and June 26, 2015, respectively.

Thailand

Fabrinet Thailand is where the majority of the Company’s operations and production takes place. The Company was not subject to tax for the period from July 2010 through June 2015 on income generated from the manufacture of products at Pinehurst Building 5, and is not subject to tax from July 2012 through June 2020 on income generated from the manufacture of products at Pinehurst Building 6. Such preferential tax treatment is contingent on, among other things, the export of the Company’s customers’ products out of Thailand and the Company’s agreement not to move its manufacturing facilities out of its current province in Thailand for at least 15 years from the date on which preferential tax treatment was granted i.e., at least until June 2020. Additionally, in March 2016, the Thailand Revenue Department announced the permanent decrease of corporate income tax rates to 20% for tax periods beginning on or after January 1, 2016. As a result, corporate income tax rates for Fabrinet Thailand remain at 20% from fiscal year 2017 onwards.

People’s Republic of China

The corporate income tax rate for Casix is 25%.

The Company’s income tax expense consisted of the following:


	Years Ended
(amount in thousands)	June 30, 2017		June 24, 2016		June 26, 2015
Current	$	6,299	$	5,413	$	4,191
Deferred		443		922		(207	)

Total income tax expense	$	6,742	$	6,335	$	3,984

The reconciliation between the Company’s taxes that would arise by applying the statutory tax rate of the country of the Company’s principal operations, Thailand, to the Company’s effective tax charge is shown below:


	Years Ended
(amount in thousands)	June 30, 2017			June 24, 2016			June 26, 2015
Income before income taxes ⁽¹⁾	$	103,857		$	68,232		$	47,626
Tax expense calculated at a statutory corporate income tax rate of 20%		20,771			13,646			9,525
Effect of income taxes from locations with tax rates different from Thailand		1,469			1,573			1,134
Income not subject to tax ⁽²⁾		(17,212	)		(10,493	)		(7,094	)
Income tax on unremitted earnings		1,058			741			1,263
Effect of different tax rate in relation to deferred tax utilization ⁽³⁾		—			894			(221	)
Effect of foreign exchange rate adjustment		667			375			(365	)
Tax rebate from research and development application		(226	)		(145	)		(102	)
Others		215			(256	)		(156	)

Corporate income tax expense	$	6,742		$	6,335		$	3,984

⁽¹⁾	Income before income taxes was mostly generated from domestic income in the Cayman Islands.

⁽²⁾

Income not subject to tax relates to income earned in the Cayman Islands and income subject to an investment promotion privilege for Building 5 and Building 6. Income not subject to tax per ordinary share on a diluted basis (in dollars) was $0.18, $0.06 and $0.20 for the years ended June 30, 2017, June 24, 2016 and June 26, 2015, respectively.

⁽³⁾	The balances were effect of different tax rate in relation to the rate recognized deferred taxes during the fiscal year and the rate when deferred taxes will be utilized in the following fiscal years.

The Company’s deferred tax assets and deferred tax liabilities, net of valuation allowance, at each balance sheet date are as follows:


	Years Ended
(amount in thousands)	June 30, 2017		June 24, 2016
Deferred tax assets:
Depreciation	$	1,674	$	1,679
Severance liability		1,127		955
Reserves and allowance		1,046		1,363
Loss carrying forward		496		—
Others		10		—

Total	$	4,353	$	3,997


	Years Ended
(amount in thousands)	June 30, 2017			June 24, 2016
Deferred tax liabilities:
Temporary differences from intangibles and changes in the fair value of assets acquired	$	(944	)	$	—
Deferred tax from unremitted earnings		(2,485	)		(1,687	)

Total		(3,429	)		(1,687	)

Net	$	924		$	2,310

As of June 30, 2017 and June 24, 2016, the Company recognized deferred tax assets of $6.4 million and $4.9 million, respectively, from tax on net operating loss carrying forward of Fabrinet West. Utilization of the tax net operating losses carrying forward may be subject to substantial limitations according to the subsidiary’s future operation, which may result in the reduced utilization of a portion of the Company’s net operating losses.

Income tax liabilities have not been established for withholding tax and other taxes that would be payable on the unremitted earnings of Fabrinet Thailand. Such amounts of Fabrinet Thailand are permanently reinvested; unremitted earnings for Fabrinet Thailand totaled $97.3 million and $68.8 million as of June 30, 2017 and June 24, 2016, respectively. Unrecognized deferred tax liabilities for such unremitted earnings were $5.2 million and $4.2 million as of June 30, 2017 and June 24, 2016, respectively.

Deferred tax liabilities of $0.8 million and $0.7 million have been established for withholding tax on the unremitted earnings of Casix for the year ended June 30, 2017, which are included in non-current deferred tax liability as of June 30, 2017 and June 24, 2016, respectively.

Uncertain income tax positions

Interest and penalties related to uncertain tax positions are recognized in income tax expense. The Company had approximately $0.6 million and $0.4 million of accrued interest and penalties related to uncertain tax positions on the consolidated balance sheets as of June 30, 2017 and June 24, 2016, respectively. The Company recorded interest and penalties of $0.3 million, $0.2 million and $0.1 million for the years ended June 30, 2017, June 24, 2016 and June 26, 2015, respectively, in the consolidated statements of operations and comprehensive income. With regard to the Thailand jurisdiction, tax years 2012 through 2016 remain open to examination by the local authorities.

The following table indicates the changes to the Company’s uncertain income tax positions for the years ended June 30, 2017, June 24, 2016 and June 26, 2015 included in other non-current liabilities.


(amount in thousands)	As of June 30, 2017		As of June 24, 2016		As of June 26, 2015
Beginning balance	$	1,420	$	1,420	$	868
Additions during the year		—		—		552
Reductions for tax positions of prior years		—		—		—

Ending balance	$	1,420	$	1,420	$	1,420