Our income tax expense, deferred tax assets and liabilities, and unrecognized tax benefits reflect management's best assessment of estimated current and future liabilities. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

The following two tables present the components of our income before provision for income taxes by geographic region and the portion of our provision for income taxes classified as current and deferred (in thousands):


	Fiscal Year Ended
	September 27, 2024		September 29, 2023		September 30, 2022
United States	$	89,505	$	44,136	$	33,318
Foreign	222,974		205,917		181,961
Total income before income taxes	$	312,479	$	250,053	$	215,279


	Fiscal Year Ended
	September 27, 2024		September 29, 2023		September 30, 2022
Current:
Federal	$	702	$	(1,053)	$	2,008
State	1,124		1,023		553
Foreign	68,013		66,776		58,285
Total current	69,839		66,746		60,846

Deferred:
Federal	(21,357)		(16,949)		(29,990)
State	43		(356)		8
Foreign	(362)		(1,032)		517
Total deferred	(21,676)		(18,337)		(29,465)
Provision for income taxes	$	48,163	$	48,409	$	31,381

As a result of the Tax Act, foreign accumulated earnings that were subject to the mandatory Transition Tax as of December 31, 2017, can be repatriated to the U.S. without incurring further U.S. federal tax. The Tax Act changed to a modified territorial tax system through the provision of a 100% dividend received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries. As a result, we have reevaluated our historical assertion and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested. During fiscal 2024, we repatriated $120 million of foreign subsidiary earnings which were exempt from foreign withholding tax. As of September 27, 2024, the total undistributed earnings of our foreign subsidiaries were approximately $262 million. The Company does not record any deferred tax liability on the portion of these foreign undistributed earnings considered indefinitely reinvested.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences were as follows (in thousands):


	Fiscal Year Ended
	September 27, 2024		September 29, 2023
Deferred income tax assets:
Investments	$	7,410	$	5,864

Inventories	5,359		5,003
Net operating loss	2,294		292

Accrued expenses	13,245		16,945
Stock-based compensation	17,223		17,833
Revenue recognition	4,394		4,563
Depreciation and amortization	139,228		130,818
Lease liability	15,657		13,911
Research and development credits	47,830		40,633
Foreign tax credits	28,777		15,684
Deemed repatriated earnings tax benefit	9,881		10,724
Other	6,067		5,075
Total gross deferred income tax assets	297,365		267,345
Less: valuation allowance	(56,922)		(50,687)
Total deferred income tax assets	240,443		216,658

Deferred income tax liabilities:

Right of use asset	(15,889)		(14,319)
Intangible assets	(4,796)		(479)

Deferred income tax assets, net	$	219,758	$	201,860

As of September 27, 2024, the NOL carryforwards for U.S. federal and California were $1.2 million and $1.6 million, respectively, and will start to expire in fiscal 2034 and 2029, respectively. Additionally, we had foreign NOL carryforwards of $8.1 million as of September 27, 2024, an amount which is not subject to expiration. As of September 27, 2024, we had foreign tax credit and federal R&D tax credit carryforwards of $15.1 million and $22.2 million, respectively, which will start to expire in fiscal 2029 and fiscal 2035, respectively. We had California R&D tax credits of $48.9 million, which will carry forward indefinitely, and foreign R&D tax credits of $6.1 million, which will start to expire in fiscal 2028.

As of September 27, 2024, a $36.8 million valuation allowance was recorded against California deferred tax assets, a $10.8 million valuation allowance was recorded against federal tax credit deferred tax assets, and a $9.3 million valuation allowance was recorded against foreign deferred tax assets for which ultimate realization of its future benefits is uncertain.

Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods. A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows:


	Fiscal Year Ended
	September 27, 2024		September 29, 2023		September 30, 2022
Federal statutory rate	21.0	%	21.0	%	21.0	%
State income taxes, net of federal effect	0.2		0.3		0.2
Stock-based compensation	1.1		1.2		(0.1)
Research and development tax credits	(2.7)		(2.7)		(5.0)
Foreign-derived intangible income deduction	(1.3)		(2.3)		(2.3)
U.S. tax on foreign entities	1.3		1.3		1.8
Foreign rate differential	(2.1)		(1.9)		(4.5)
Increase (decrease) unrecognized tax benefit	0.6		1.9		2.8
Tax Act of 2017	(3.2)		—		—

Other	0.5		0.6		0.7
Effective tax rate	15.4	%	19.4	%	14.6	%

Our effective tax rate was 15.4% in fiscal 2024, compared with our federal statutory rate of 21.0%, and with our effective tax rate in fiscal 2023 of 19.4%. The decrease in our effective tax rate was primarily due to a tax benefit related to the Transition Tax liability under the Tax Cuts and Jobs Act of 2017, which resulted from the application of a recent U.S. Tax Court opinion in Varian Medical Systems, Inc. v. Commissioner. On August 26, 2024, the U.S. Tax Court opined that a deduction for certain deemed foreign dividends can be claimed for otherwise taxable foreign dividends under the Transition Tax of the Tax Cuts and Jobs Act. As a result of the opinion, we intend to timely file claims for refund to reduce a portion of our Transition Tax liability. We recorded a benefit of $10.0 million with a corresponding increase of $10.8 million to taxes receivable and $0.8 million increase to uncertain tax benefit in fiscal 2024. Additionally, we recognized tax benefits from previously unrecognized tax benefits due to a lapse in the statute of limitations and reduced benefit from foreign operations.

Our effective tax rate was 19.4% in fiscal 2023, compared with our effective tax rate in fiscal 2022 of 14.6%. The increase in our effective tax rate was primarily due to lower tax benefits related to settlement of stock-based awards and reduced benefit from less R&D tax credits.

As of September 27, 2024, the total amount of gross unrecognized tax benefits was $81.6 million, of which $49.9 million, if recognized, would reduce our effective tax rate. Our liability increased from fiscal 2023 primarily due to additional accruals in fiscal 2024, partially offset by releases due to the lapse of statute of limitations. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets. Over the next twelve months, we estimate that this amount could be reduced by $1.4 million as a result of the expiration of certain statutes of limitations. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):


	Fiscal Year Ended
	September 27, 2024		September 29, 2023		September 30, 2022
Beginning Balance	$	76,304	$	69,682	$	66,106
Gross increases - tax positions taken during prior years	2,346		219		822
Gross decreases - tax positions taken during prior years	—		(1,143)		(178)
Gross increases - tax positions taken during current year	10,626		7,546		7,784
Gross decreases - settlements with tax authorities during current year	(343)		—		—
Lapse of statute of limitations	(7,318)		—		(4,852)
Ending Balance	$	81,615	$	76,304	$	69,682

We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision. In fiscal 2024, our current tax provision was increased by interest expense of $3.3 million, while in fiscal year 2023, our current tax provision was increased by interest expense of $3.5 million. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of September 27, 2024 and September 29, 2023 were as follows (in thousands):


	Fiscal Year Ended
	September 27, 2024		September 29, 2023
Accrued interest	$	13,597	$	10,254
Accrued penalties	225		172
Total	$	13,822	$	10,426

We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. We file income tax returns in the U.S. federal, states, and foreign jurisdictions. Our major tax jurisdictions are the U.S. federal, California, New York, and Ireland.

Our operations in certain jurisdictions remain subject to examination for fiscal 2013 to 2023, some of which are currently under audit or review. We are currently under audit by the IRS for our fiscal 2018 U.S. federal tax year. The resolution of each of these audits is not expected to be material to our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If resolution of any tax issues addressed in our current audits are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period such resolution occurs.

The final U.S. foreign tax credit regulations, issued on January 4, 2022, introduced significant changes to foreign tax credit utilization. However, additional relief has delayed the effective date of the final U.S. foreign tax credit regulations until further guidance to withdraw or modify the temporary relief. These provisions may have a material adverse effect on our future tax provisions unless modified.

The Organisation for Economic Co-operation and Development (“OECD”) published its model rules “Tax Challenges Arising From the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two)” which established a global minimum corporate tax rate of 15% for certain multinational enterprises. Many countries have implemented or are in the process of implementing the Pillar Two legislation, which will apply to Dolby beginning in fiscal year 2025. While we do not currently estimate a material impact to our consolidated financial statements, we continue to monitor the impact as countries implement legislation and the OECD provides additional guidance.