| Income Taxes | (14) Income Taxes

Income before income taxes for the years ended June 30, 2018, 2017 and 2016 , was taxed under the following jurisdictions (in thousands):



2018
2017
2016
 U.S.
$ 42,627
$ (4,985)
$ 1,785
 Non-U.S.
478,685
423,728
437,781

$ 521,312
$ 418,743
$ 439,566

The provision for income taxes is presented below (in thousands):


2018
2017
2016
 Current:
Federal
$ 128,971
$ 16,468
$ 24,325

State
948
(1,159)
5,805

Non-U.S.
68,858
65,612
58,023

198,777
80,921
88,153
 Deferred:
Federal
9,488
11,385
5,640

State
(350)
2,706
(1,644)

Non-U.S.
(2,191)
(18,553)
(4,992)

6,947
(4,462)
(996)
 Provision for income taxes
$ 205,724
$ 76,459
$ 87,157

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. federal income tax rate of 28% for the year ended June 30, 2018 and 35% for the years ended June 30, 2017 and 2016, to pretax income as a result of the following (in thousands):



2018
2017
2016
 Taxes computed at statutory U.S. rate (1)
$ 146,280
$ 146,560
$ 153,848
 Increase (decrease) in income taxes resulting from:
 Transition tax
126,753
-
-
 State income taxes, net of U.S. tax benefit
2,427
(1,294)
2,573
 Research and development credit
(4,089)
(2,804)
(5,138)
 Change in statutory tax rates
16,685
-
-
 Tax effect of dividends
-
97,662
80,754
 Change in valuation allowance
(2,962)
4,021
(5,882)
 Effect of non-U.S. tax rates
(70,250)
(97,141)
(91,124)
 Foreign tax credits (2)
(6,473)
(67,689)
(44,835)
 Stock-based compensation expense
(7,045)
(3,107)
(8,170)
 Other
4,398
251
5,131

$ 205,724
$ 76,459
$ 87,157

(1) In fiscal year 2018, as a result of U.S. tax legislation, the statutory U.S. tax rate was 28%.
(2) In fiscal year 2018, $75.5 million of the foreign tax credit is included as a reduction in the transition tax.

The components of our deferred tax assets and liabilities at June 30, 2018 and June 30, 2017 , are as follows (in thousands):




2018
2017
 Deferred tax assets:
 Employee liabilities
$ 16,184
$ 19,275
 Tax credit carry overs
9,031
501
 Inventories
5,840
10,126
 Provision for warranties
3,904
4,766
 Provision for doubtful debts
3,817
2,967
 Net operating loss carryforwards
26,355
36,117
 Capital loss carryover
3,932
2,625
 Property, plant and equipment
6,121
3,850
 Stock-based compensation expense
9,322
15,143
 Other
4,515
4,569

89,021
99,939
 Less valuation allowance
(12,297)
(15,259)
 Deferred tax assets
76,724
84,680
 Deferred tax liabilities:
 Goodwill and other intangibles
(35,990)
(36,999)
 Deferred tax liabilities
(35,990)
(36,999)
 Net deferred tax asset
$ 40,734
$ 47,681

We reported the net deferred tax assets and liabilities in our consolidated balance sheets at June 30, 2018 and June 30, 2017 , as follows (in thousands):



2018
2017
 Non-current deferred tax asset
$ 53,818
$ 61,503
 Non-current deferred tax liability
(13,084)
(13,822)
 Net deferred tax asset
$ 40,734
$ 47,681

As of June 30, 2018 , we had $61.0 million of U.S. federal and state net operating loss carryforwards and $93.7 million of non-U.S. net operating loss carryforwards, which expire in various years beginning in 2018 or carry forward indefinitely.

The valuation allowance at June 30, 2018 relates to a provision for uncertainty of the utilization of net operating loss carryforwards of $9.2 million and capital loss and other items of $3.0 million. We believe that it is more likely than not that the benefits of deferred tax assets, net of any valuation allowance, will be realized.

A substantial portion of our manufacturing operations and administrative functions in Malaysia and Singapore operate under various tax holidays and tax incentive programs that will expire in whole or in part at va rious dates through June 30, 203 0. The end of certain tax holidays may be extended if specific conditions are met. The net impact of these tax holidays and tax incentive programs increased our net earnings by $33.5 million ( $0.23 per diluted share) for the year ended June 30, 2018 and $19.5 million ( $0.14 per diluted share) for the year ended June 30, 2017 .


During the year ended June 30, 2018 , as a result of the U.S. Tax Act , we have treated all non-U.S. historical earnings as taxable, which resulted in additional tax expense of $126.9 million which is payable over the next eight years. Therefore, future repatriation of cash held by our non-U.S. subsidiaries will generally not be subject to U.S. federal tax if repatriated. The total amount of these undistributed earnings at June 30, 2018 amounted to approximately $2.6 billion. If these earnings had not been permanently reinvested, deferred taxes of approximately $4.0 million would have been recognized in the consolidated financial statements.

In accounting for uncertainty in income taxes, we recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (that is, a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for annual periods. The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying consolidated statements of income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on June 30, 2018 , is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate.

Our income tax returns are based on calculations and assumptions subject to audit by various tax authorities. In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws. We regularly assess the potential outcomes of examinations by tax authorities in determining the adequacy of our provision for income taxes.

In connection with the audit by the Australian Taxation Office (“ATO”) for the tax years 2009 to 2013 , we received Notices of Amended Assessments in March 2018. Based o n these assessments, the ATO assert ed that we owe $151.7 million in additional income tax and $38.4 million in accrued interest , of which $75.9 million was paid i n April 2018 under a payment arrangement with the ATO . At June 30, 2018, we have recorded a receivable in prepaid taxes and other non-current assets for the amount paid as we ultimately expect this will be refunded by the ATO. In June 2018 , we received a notice from the ATO claiming penalties of 50% of the additional income tax that was assessed or $75.9 million. We do not agree with the ATO’s assessments and continue to believe we are more likely than not to be successful in defending our position. We have also been notified by the ATO that they intend to audit tax years 2014 to 2017.

Our income tax expense, short-term income taxes payable and long-term income taxes payable were impacted by charges associated with the U.S. Tax Act enacted on December 22, 2017, which resulted in additional income tax expense of $138.0 million during the year ended June 30, 2018 . Specifically, the income tax expense includes the transition tax imposed on our accumulated foreign earnings, which resulted in additional income tax expense of $12 6 . 9 million for the year ended June 30, 2018. Additionally, it resulted in t he write down in the carrying value of our net deferred tax assets due to the lower corporate tax rate and the reduction in the future value of deferred tax assets, which resulted in additional income tax expense of $11.1 million recorded in the year ended June 30, 2018 .

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the additio nal estimated income tax of $138.0 million represents our best estimate based on current interpretation of the U.S. Tax Act as we are still accumulating data to finaliz e the underlying calculations, or in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the U.S. Tax Act . In accordance with SAB 118, the additional estimated income tax of $13 8 . 0 million recorded for the year ended June 30, 2018 is considered provisional and will be finalized before December 22, 2018. |
