Aramark

INCOME TAXES:

The Company accounts for income taxes using the asset and liability method. Under this method, the provision for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases in assets and liabilities and are adjusted for changes in tax rates and enacted tax legislation. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

The components of income before income taxes by source of income are as follows (in thousands):



	Fiscal Year Ended
	September 29, 2017		September 30, 2016		October 2, 2015
United States	$	362,783	$	284,216	$	250,069
Non-U.S.	157,859		146,715		91,927
	$	520,642	$	430,931	$	341,996

The provision for income taxes consists of (in thousands):



	Fiscal Year Ended
	September 29, 2017			September 30, 2016			October 2, 2015
Current:
Federal	$	111,175		$	39,510		$	64,221
State and local	15,455			15,750			15,223
Non-U.S.	57,681			35,023			29,684
	184,311			90,283			109,128
Deferred:
Federal	(21,956		)	47,323			(585		)
State and local	3,165			(740		)	(208		)
Non-U.S.	(19,065		)	5,833			(3,315		)
	(37,856		)	52,416			(4,108		)
	$	146,455		$	142,699		$	105,020

Current taxes receivable of $9.6 million and $48.5 million at September 29, 2017 and September 30, 2016, respectively, are included in "Prepayments and other current assets" in the Consolidated Balance Sheets. Current income taxes payable of $30.7 million and $10.3 million at September 29, 2017 and September 30, 2016, respectively, are included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.

The provision for income taxes varies from the amount determined by applying the United States Federal statutory rate to pretax income as a result of the following (all percentages are as a percentage of income before income taxes):



	Fiscal Year Ended
	September 29, 2017		September 30, 2016		October 2, 2015
United States statutory income tax rate	35.0	%	35.0	%	35.0	%
Increase (decrease) in taxes, resulting from:
State income taxes, net of Federal tax benefit	2.3		2.3		2.9
Foreign taxes	(4.3	)	(1.4	)	(3.7	)
Permanent book/tax differences⁽¹⁾	(3.8	)	0.3		0.3
Uncertain tax positions	1.4		0.1		(0.5	)
Tax credits & other	(2.5	)	(3.2	)	(3.3	)
Effective income tax rate	28.1	%	33.1	%	30.7	%

(1) Includes the reduction of approximately 4% related to the adoption of the ASU related to share-based payment transactions in fiscal 2017 (see Note 1).

The effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which it operates. Judgment is required in determining the effective tax rate and in evaluating the tax return positions. Reserves are established when positions are "more likely than not" to be challenged and not sustained. Reserves are adjusted at each financial statement date to reflect the impact of audit settlements, expiration of statutes of limitation, developments in tax law and ongoing discussions with tax authorities. Accrued interest and penalties associated with uncertain tax positions are recognized as part of the income tax provision.

As of September 29, 2017, certain subsidiaries have recorded deferred tax assets of $21.3 million associated with accumulated federal, state and foreign net operating loss carryforwards. The Company believes it is more likely than not that the benefit from certain state net operating loss ("NOL") carryforwards will not be realized. As a result, the Company has recorded a valuation allowance of approximately $11.5 million on the deferred tax asset related to these state NOL carryforwards.

As of September 29, 2017, the Company has approximately $24.8 million of foreign tax credit carryforwards, which expire in 2027. The Company believes there is sufficient taxable income in the carryforward period to utilize these credits; and a valuation allowance was not provided.

As of September 29, 2017 and September 30, 2016, the components of deferred taxes are as follows (in thousands):



	September 29, 2017			September 30, 2016
Deferred tax liabilities:
Property and equipment	$	92,268		$	87,191
Investments	20,317			46,125
Other intangible assets, including goodwill	629,153			655,319
Inventory	97,622			97,796
Other	25,992			15,897
Gross deferred tax liability	865,352			902,328
Deferred tax assets:
Derivatives	—			1,618
Insurance	33,811			19,276
Employee compensation and benefits	209,951			249,509
Accruals and allowances	31,026			21,716
Net operating loss/credit carryforwards and other	48,793			26,707
Gross deferred tax asset, before valuation allowances	323,581			318,826
Valuation allowances	(11,513		)	(7,352		)
Net deferred tax liability	$	553,284		$	590,854

Deferred tax liabilities of approximately $570.9 million and $608.4 million as of September 29, 2017 and September 30, 2016, respectively, are included in "Deferred Income Taxes and Other Noncurrent Liabilities" in the Consolidated Balance Sheets. Deferred tax assets of approximately $17.6 million and $17.4 million as of September 29, 2017 and September 30, 2016, respectively, are included in "Other Assets" in the Consolidated Balance Sheets.

Prior to fiscal 2017, the Company provided deferred taxes on all unremitted earnings of its foreign subsidiaries. Effective for the first quarter of fiscal 2017, the Company asserted that the prospective unremitted earnings of certain foreign subsidiaries would be permanently invested. As a result of a foreign restructuring plan completed in the fourth quarter of fiscal 2017, the Company further asserted all unremitted earnings of certain foreign subsidiaries held as of September 29, 2017, are permanently invested outside the U.S. Accordingly, the Company recorded a net benefit related to this assertion of approximately $1.9 million to the Consolidated Statements of Income.

Undistributed earnings of foreign subsidiaries for which no deferred tax liability has been recorded are approximately $40.0 million at September 29, 2017. Those earnings are considered to be indefinitely reinvested and, accordingly, no deferred income taxes have been provided. If the unremitted earnings are no longer permanently invested in a subsequent period, the Company will record a provision for deferred income taxes on these unremitted earnings. The estimated tax cost associated with remitting these earnings is not expected to have a significant adverse effect on the results of operations.

The Company has approximately $30.8 million of total gross unrecognized tax benefits as of September 29, 2017, all of which, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits follows (in thousands):



	September 29, 2017			September 30, 2016
Balance, beginning of year	$	22,752		$	21,412
Additions based on tax positions taken in the current year	9,323			481
Additions for tax positions taken in prior years	4,028			2,141
Reductions for remeasurements, settlements and payments	(3,972		)	(185		)
Reductions due to statute expiration	(1,319		)	(1,097		)
Balance, end of year	$	30,812		$	22,752

The Company has approximately $5.0 million and $6.0 million accrued for interest and penalties as of September 29, 2017 and September 30, 2016, respectively, and recorded approximately ($1.0) million and $0.4 million in interest and penalties during fiscal 2017 and fiscal 2016, respectively. Interest and penalties related to unrecognized tax benefits are recorded in "Provision for income taxes" in the Consolidated Statements of Income.

Unrecognized tax benefits are not expected to significantly change within the next 12 months.

Generally, a number of years may elapse before a tax reporting year is audited and finally resolved. With few exceptions, the Company is no longer subject to U.S. federal, state or local examinations by tax authorities before 2013. While it is often difficult to predict the final outcome or the timing of or resolution of a particular tax matter, the Company does not anticipate any adjustments resulting from U.S. federal, state or foreign tax audits that would result in a material change to the financial condition or results of operations. Adequate amounts are established for any adjustments that may result from examinations for tax years after 2013. However, an unfavorable settlement of a particular issue would require use of the Company's cash.