Entity information:
Note 15. Income Taxes
Our income (loss) before income taxes consisted of the following (in millions):
 
Years Ended
 
July 1, 2017

July 2, 2016

June 27, 2015
Domestic
$
(78.4
)
 
$
60.7

 
$
(58.7
)
Foreign
18.6

 
(51.0
)
 
34.2

Income (loss) before income taxes
$
(59.8
)
 
$
9.7

 
$
(24.5
)

Our income tax (benefit) expense consisted of the following (in millions):
 
Years Ended
 
July 1, 2017

July 2, 2016

June 27, 2015
Federal:
 
 
 
 
 
Current
$
13.7

 
$
1.6

 
$
—

Deferred
—

 
—

 
—

 
13.7

 
1.6

 
—

State:
 
 
 
 
 
Current
0.1

 
0.2

 
0.1

Deferred
—

 
—

 
—

 
0.1

 
0.2

 
0.1

Foreign:
 
 
 
 
 
Current
2.1

 
1.2

 
(20.3
)
Deferred
26.8

 
(2.6
)
 
(0.9
)
 
28.9

 
(1.4
)
 
(21.2
)
Total income tax (benefit) expense
$
42.7

 
$
0.4

 
$
(21.1
)

The Company’s effective tax rate differs from the U.S. Federal statutory income tax rate as follows (in millions):
 
Years Ended
 
July 1, 2017

July 2, 2016

June 27, 2015
Income tax (benefit) expense computed at federal statutory rate
$
(20.9
)
 
$
3.4

 
$
(8.6
)
State taxes, net of federal benefit
0.1

 
0.1

 
—

Foreign rate differential
(4.8
)
 
21.3

 
0.2

Change in valuation allowance
21.5

 
(29.4
)
 
(2.2
)
Reversal of previously accrued taxes
—

 
—

 
(21.8
)
Research and experimentation benefits and other tax credits
(2.9
)
 
(4.4
)
 
(3.1
)
Permanent items
0.3

 
0.7

 
(0.7
)
Stock-based compensation
4.9

 
4.3

 
1.2

Fair value adjustment
36.5

 
—

 
—

Subpart F
—

 
4.0

 
12.7

Unrecognized tax benefits
8.4

 
—

 
1.0

Other
(0.4
)
 
0.4

 
0.2

Total income tax (benefit) expense
$
42.7

 
$
0.4

 
$
(21.1
)

The components of our net deferred taxes consisted of the following (in millions):
 
Years Ended
 
July 1, 2017
 
July 2, 2016
 
June 27, 2015
Gross deferred tax assets:
 
 
 
 
 
Intangibles
$
217.4

 
$
230.2

 
$
—

Tax credit carryforwards
34.9

 
43.8

 
41.6

Net operating loss carryforwards
11.5

 
16.1

 
61.0

Inventories
11.7

 
10.9

 
7.7

Accruals and reserves
19.7

 
9.9

 
4.1

Fixed assets
11.4

 
11.1

 
21.7

Capital loss carryforwards
12.4

 
11.9

 
12.4

Unclaimed research and experimental development expenditure
23.0

 
19.5

 
16.7

Other
0.4

 
0.6

 
5.4

Stock-based compensation
3.1

 
—

 
—

Acquisition-related items
—

 
—

 
29.4

Gross deferred tax assets
345.5

 
354.0

 
200.0

Valuation allowance
(296.4
)
 
(321.4
)
 
(160.0
)
Deferred tax assets
49.1

 
32.6

 
40.0

Gross deferred tax liabilities:
 
 
 
 
 
Intangible amortization
(1.1
)
 
(1.0
)
 
(6.7
)
Convertible note
(44.4
)
 
—

 
—

Undistributed foreign earnings
—

 
—

 
(2.6
)
Other
—

 
—

 
(1.2
)
Deferred tax liabilities
(45.5
)
 
(1.0
)
 
(10.5
)
Total net deferred tax assets
$
3.6

 
$
31.6

 
$
29.5


The Realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. The Company regularly assesses the ability to realize its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The Company weighs all available positive and negative evidence, including its earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies. Due to the weight of objectively verifiable negative evidence, including its history of losses in certain jurisdictions, the Company believes that it is more likely than not that its U.S. federal, state, and Canadian deferred tax assets will not be realized as of July 1, 2017. Accordingly, the Company has recorded a valuation allowance on such deferred tax assets.
The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. In the event the Company determines that it will be able to realize all or part of its net deferred tax assets in the future, the valuation allowance against deferred tax assets will be reversed in the period in which the Company makes such determination. The release of a valuation allowance against deferred tax assets may cause greater volatility in the effective tax rate in the periods in which the valuation allowance is released. It is reasonably possible that significant positive evidence may become available to reach a conclusion that a significant portion of the valuation allowance will no longer be needed, and as such, we may release a significant portion of our valuation allowance in the next 12 months.
The valuation allowance against our various deferred tax assets decreased by $25.0 million in fiscal 2017, and increased by $161.4 million in fiscal 2016. The decrease in the valuation allowance during fiscal 2017 was primarily related to the amortization of intangible assets, utilization of tax attributes, and the tax effects of the Convertible Senior Notes. The increase during fiscal 2016 was primarily due to a step up in the tax basis of intangible assets, which was offset by a valuation allowance. The step-up was the result of the Separation from Viavi, and consequently, a significant portion of the change in the valuation allowance had no impact on the effective tax rate.
As of July 1, 2017, the Company had federal and foreign tax net operating loss carryforwards of $6.9 million and $35.9 million, respectively. These carryforwards will begin to expire in the fiscal years ending 2022 and 2025, respectively. The federal net operating loss carryforwards are subject to Internal Revenue Code Section 382 which imposes limitations on annual utilization after a change of ownership.
Additionally, the Company has federal, state, and foreign research and other tax credit carryforwards of $4.3 million, $7.2 million, and $43.0 million, respectively. A portion of the federal credits will begin to expire in the fiscal year ending 2036 and California credits can be carried forward indefinitely. The foreign tax credits will begin to expire in the fiscal year ending 2020.
As a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities does not include certain deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting. Equity will be increased by $2.5 million if and when such deferred tax assets are ultimately realized. We use ASC 740 ordering when determining when excess tax benefits have been realized.
U.S. income and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $0.6 million of undistributed earnings for certain foreign subsidiaries. We intend to reinvest these earnings indefinitely outside of the United States. We estimate that an additional $0.1 million of U.S. income or foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S. federal statutory rate.
A reconciliation of unrecognized tax benefits between June 27, 2015 and July 1, 2017 is as follows (in millions):
Balance at June 27, 2015
$
0.2

Reductions based on the tax positions related to the prior year
(0.1
)
Additions based on tax positions related to current year
2.1

Balance at July 2, 2016
$
2.2

Additions based on the tax positions related to the prior year
1.6

Additions based on tax positions related to current year
9.5

Balance at July 1, 2017
$
13.3


Included in the balance of unrecognized tax benefits as of July 1, 2017 is $3.6 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance. Also, included in the balance of unrecognized tax benefits as of July 1, 2017 is $10.5 million of tax benefits that, if recognized, would impact the effective tax rate.
Our policy is to recognize accrued interest and penalties related to unrecognized tax benefits within the income tax provision. The amount of interest and penalties accrued as of July 1, 2017 and July 2, 2016 were $0.9 million and $0.1 million, respectively. During fiscal 2017, accrued interest and penalties increased by $0.8 million.
The Company files income tax returns in the US federal jurisdiction as well as many US states and foreign jurisdictions. The Company’s major tax jurisdictions are the U.S. federal government, the state of California, and Canada. The U.S. federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service, or IRS. The California corporation income tax returns beginning with the fiscal year 2016 will remain subject to examination by the California Franchise Tax Board. The Canada corporation income tax returns beginning with the 2009 year remain subject to examination by the Canadian tax authorities. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years which have been carried forward and may be audited in subsequent years when utilized.
The Company is subject to the continuous examination of income tax returns by various foreign tax authorities. The timing of resolutions and closures of tax audits is highly unpredictable. Given the uncertainty, it is reasonably possible that certain tax audits may be concluded within the next 12 months that could materially impact the balance of our gross unrecognized tax benefits. An estimate of the range of increase or decrease that could occur in the next twelve months cannot be made. However, the estimated impact to tax expense and net income from the resolution and closure of tax exams is not expected to be significant within the next 12 months.