16. Income Taxes

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code that affect fiscal 2017, including, but not limited to requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years (the "Transition Tax"). The Tax Act also establishes new tax laws that will affect 2018 and later years, including, but not limited to, a reduction of the U.S. federal corporate tax rate from 35% to 21%, a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries and a new provision designed to tax global intangible low-taxed income ("GILTI").

In connection with its initial analysis of the impact of the Tax Act, the Company has recorded a net tax expense of $26.3 million in fiscal 2017 which primarily consists of a net expense for the Transition Tax of $54.4 million as well as a net expense of $21.8 million related to the revaluation of the Company's deferred tax assets and liabilities. These net expense items are partially offset by a benefit of $39.4 million realized primarily as a result of the write off of a deferred tax liability that the Company had previously recorded for anticipated future earnings of one of its foreign subsidiaries related to the treatment of stock-based compensation in the Company's intercompany cost-sharing arrangement. In addition, these net expense items were also offset by a benefit of $10.5 million for the release of valuation allowances related to certain U.S. federal tax attributes that are now expected to be fully utilized.

The Company has not completed its accounting for the income tax effects of the Tax Act. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SEC Staff Accounting Bulletin No. 118. Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.

The Company's accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, has recorded provisional amounts as follows:

Revaluation of deferred tax assets and liabilities: The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. In addition, the Tax Act makes certain changes to the depreciation rules and implements new limits on the deductibility of certain executive compensation. The Company has evaluated these changes and has recorded a provisional decrease to net deferred tax assets of $21.8 million with a corresponding increase to deferred tax expense. The Company is still completing its calculation of the impact of these changes on its deferred tax balances.

100% dividends received deduction: Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Prior to enactment of the Tax Act, while the Company had asserted indefinite reinvestment of the foreign earnings of its foreign subsidiaries, in 2015, the Company began accruing a deferred tax liability for future earnings to be generated by one of its foreign subsidiaries upon resolution of the Altera case. The deferred tax liability was accrued in order to provide for the future U.S. tax cost of such earnings as these future earnings were not considered by the Company to be indefinitely reinvested. Under the Tax Act, these future earnings should not be subject to U.S. tax and therefore, the Company has released the deferred tax liability for this item. This release resulted in an increase to the net deferred tax asset of $39.4 million with a corresponding deferred tax benefit. The Company believes this is a reasonable estimate of the impact of the Tax Act but considers the release of this deferred tax liability as provisional pending further interpretation and guidance regarding how to account for certain aspects of the Tax Act.

Transition Tax on unrepatriated foreign earnings: The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, among other factors, the amount of post-1986 E&P of its foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and has recorded a provisional Transition Tax expense of $54.4 million. The Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax to complete its calculation of E&P as well as the final determination of non-U.S. income taxes paid.

Valuation allowances: The Company must assess whether its valuation allowance analyses for deferred tax assets are affected by various aspects of the Tax Act (e.g., deemed repatriation of deferred foreign income, future GILTI inclusions, new categories of foreign tax credits). Since, as discussed herein, the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional. Prior to 2017, the Company had recorded valuation allowances for certain tax attributes that the Company estimated were not more likely than not to be utilized prior to their expiration. Based on a preliminary review of its 2017 and future taxable income, the Company has recorded a provisional release of valuation allowance in the amount of $10.5 million with a corresponding deferred tax benefit.

The Company's accounting for the following elements of the Tax Act is incomplete, and it has not yet been able to make reasonable estimates of the effects of these items. Therefore, no provisional amounts were recorded.

Global intangible low taxed income ("GILTI"): The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not yet completed its analysis of the GILTI tax rules and is not yet able to reasonably estimate the effect of this provision of the Tax Act or make an accounting policy election for the ASC 740 treatment of the GILTI tax. Therefore, the Company has not recorded any amounts related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI.

Indefinite reinvestment assertion: Beginning in 2018, the Tax Act provides a 100% deduction for dividends received from 10-percent owned foreign corporations by U.S. corporate shareholders, subject to a one-year holding period. Although dividend income is now exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, companies must still apply the guidance of ASC 740-30-25-18 to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. While the Company has accrued the Transition Tax on the deemed repatriated earnings that were previously indefinitely reinvested, the Company was unable to determine a reasonable estimate of the remaining tax liability, if any, under the Tax Act for its remaining outside basis differences or evaluate how the Tax Act will affect the Company's existing accounting position to indefinitely reinvest unremitted foreign earnings. Therefore, the Company has not included a provisional amount for this item in its financial statements for fiscal 2017. The Company will record amounts as needed for this item beginning in the first reporting period during the measurement period in which the Company obtains necessary information and is able to analyze and prepare a reasonable estimate.

Income before income taxes includes the following components (in thousands):

	Year Ended

	December 30, 2017		December 31, 2016		January 2, 2016
Domestic	$	9,700	$	4,313	$	2,249
Foreign		67,203		60,183		28,014

	$	76,903	$	64,496	$	30,263

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

	Year Ended

	December 30, 2017			December 31, 2016			January 2, 2016
Current:
Domestic	$	48,947		$	2,639		$	951
Foreign		7,077			4,421			3,015

Total Current		56,024			7,060			3,966
Deferred:
Domestic		(25,760	)		(2,430	)		(5,825	)
Foreign		(453	)		(1,628	)		2,536

Total Deferred		(26,213	)		(4,058	)		(3,289	)

Provision for income taxes	$	29,811		$	3,002		$	677

The current domestic provision for income taxes of $48.9 million includes a one-time amount payable for the net Transition Tax of $42.6 million. Under the provisions of the Tax Act, a company is permitted to elect to pay this liability over an eight year period without interest. The Company plans to make that election. The Company currently estimates that $3.4 million of this Transition Tax liability will be paid within the next twelve months.

The reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:

	Year Ended

	December 30, 2017			December 31, 2016			January 2, 2016
Federal statutory rate		35.0	%		35.0	%		35.0	%
Foreign tax rate benefit		(25.2	)		(27.2	)		(30.7	)
Research and development tax credits		(4.5	)		(4.1	)		(5.6	)
Release of prior year unrecognized tax benefits		(0.6	)		(1.7	)		(1.9	)
Excess officer compensation		1.5			1.4			3.2
Change in cost-sharing treatment of stock-based compensation		5.2			(0.5	)		(7.1	)
Excess tax benefit of stock-based compensation		(5.6	)		—			—
Change in prior period valuation allowance		(1.3	)		(0.6	)		8.8
Transition tax on unremitted foreign earnings		70.8			—			—
Revaluation of deferred tax balances		28.2			—			—
Other deferred tax impacts of tax reform		(64.8	)		—			—
Other		0.1			2.4			0.5

Effective Tax Rate		38.8	%		4.7	%		2.2	%

The effective tax rate for fiscal 2017 increased from fiscal 2016 primarily due to the one-time Transition Tax on unrepatriated earnings of certain foreign subsidiaries as a result of the enactment of the Tax Act. Additional tax expense was also recognized for the revaluation of the Company's deferred tax assets and liabilities. These increases in tax expense were partially offset by the release of a deferred tax liability related to future foreign earnings expected under the Company's intercompany cost-sharing arrangement, as well as a decrease in the valuation allowance established on federal research and development tax credits.

The effective tax rate for fiscal 2016 increased from fiscal 2015 primarily due to fiscal 2015 including a net benefit from a change in the tax accounting treatment of stock-based compensation in a cost-sharing arrangement following a U.S. Tax Court case (Altera). The increase in the effective tax rate was offset by a reduction in the prior period valuation allowance.

On July 27, 2015, the U.S. Tax Court (the "Court") issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the Court on December 1, 2015. In its opinion, the Court accepted Altera's position of excluding stock-based compensation from its cost-sharing arrangement and concluded that the related U.S. Treasury Regulations were invalid. In February 2016, the U.S. Internal Revenue Service (the "IRS") appealed the decision to the U.S Court of Appeals for the Ninth Circuit. Although the IRS has appealed the decision, and the U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations, based on the facts and circumstances of the Tax Court Case, the Company believes that it is more likely than not that the Tax Court decision will be upheld. As of the end of fiscal 2017, after revaluation to the new U.S. federal tax rate under the Tax Act, the Company's financial statements reflect a deferred tax asset for this item of $22.0 million. Also as a result of the enactment of the Tax Act, the Company has reversed the deferred tax liability of $39.4 million it had previously recorded for the U.S. tax cost of potential repatriation of the associated foreign earnings. The Company will continue to monitor ongoing developments and potential impacts to its Consolidated Financial Statements.

The Company's operations in Singapore are subject to reduced tax rates through June 30, 2019, as long as certain conditions are met. Without the impact of the one-time Transition Tax, the income tax benefit from the reduced Singapore tax rate reflected in earnings was approximately $11.0 million (representing $0.25 per diluted share) in fiscal 2017, approximately $7.7 million (representing $0.18 per diluted share) in fiscal 2016 and approximately $14.4 million (representing $0.34 per diluted share) in fiscal 2015.

Deferred Income Taxes

Deferred tax assets and liabilities are recorded for the estimated tax impact of temporary differences between the tax basis and book basis of assets and liabilities. Significant components of the Company's deferred taxes as of December 30, 2017 and December 31, 2016 are as follows (in thousands):

	December 30, 2017			December 31, 2016

Deferred tax assets:
Net operating loss carryforwards	$	12,925		$	21,187
Research and development tax credit carryforwards		12,322			15,068
Stock-based compensation		5,256			7,396
Capitalized research and development		3,468			6,802
Deferred income on shipments to distributors		7,070			9,338
Expected future cost-sharing adjustment		19,961			29,719
Accrued liabilities and other		8,620			11,321

		69,622			100,831
Less: Valuation allowance		(6,518	)		(12,361	)

		63,104			88,470
Deferred tax liabilities:
Acquired intangible assets		13,884			25,785
Depreciation and amortization		1,274			2,939
Unremitted foreign earnings for expected future cost-sharing adjustment		—			31,165
Convertible debt		10,351			—
Prepaid expenses and other		1,421			3,069

		26,930			62,958

Net deferred tax assets	$	36,174		$	25,512

As of December 30, 2017, the Company had federal net operating loss and research and development tax credit carryforwards of approximately $37.5 million and $1.9 million, respectively, as a result of the Silicon Clocks, Spectra Linear and Ember acquisitions. These carryforwards expire in fiscal years 2020 through 2031. Recognition of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used.

As of December 30, 2017, the Company had foreign net operating loss carryforwards of approximately $9.6 million as a result of the Energy Micro acquisition. These loss carryforwards do not expire and recognition is not subject to an annual limit.

The Company also had state loss, state tentative minimum tax credit, and research and development tax credit carryforwards of approximately $44.1 million, $0.1 million, and $13.4 million, respectively. A portion of these loss and credit carryforwards was generated by the Company and a portion was acquired through the Integration Associates, Silicon Clocks, Spectra Linear, Ember and Zentri acquisitions. Certain of these carryforwards expire in fiscal years 2018 through 2036, and others do not expire. Recognition of some of these loss and credit carryforwards is subject to an annual limit, which may cause them to expire before they are used.

A valuation allowance is established against a deferred tax asset when it is more likely than not that the deferred tax asset will not be realized. As of December 30, 2017, the Company maintains a valuation allowance with respect to certain deferred tax assets relating primarily to state research and development tax credit and net operating loss carryforwards.

Uncertain Tax Positions

The following table summarizes the activity related to gross unrecognized tax benefits (in thousands):

	Year Ended

	December 30, 2017			December 31, 2016			January 2, 2016
Beginning balance	$	3,054		$	3,610		$	3,929
Additions based on tax positions related to current year		456			439			432
Additions based on tax positions related to prior years		114			99			—
Reductions for tax positions as a result of a lapse of the applicable statute of limitations		(437	)		(1,094	)		(751	)

Ending balance	$	3,187		$	3,054		$	3,610

As of December 30, 2017, December 31, 2016 and January 2, 2016, the Company had gross unrecognized tax benefits of $3.2 million, $3.0 million and $3.6 million, respectively, of which $3.2 million, $2.2 million and $3.2 million, respectively, would affect the effective tax rate if recognized.

The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes. These amounts were not material for fiscal years 2017, 2016 and 2015.

The Norwegian Tax Administration ("NTA") has completed its examination of the Company's Norwegian subsidiary for income tax matters relating to fiscal years 2013, 2014, 2015 and 2016. The Company received a final assessment from the NTA in December 2017 concerning an adjustment to its 2013 taxable income related to the pricing of an intercompany transaction. The adjustment to 2013 taxable income would result in additional Norwegian tax of approximately $30.0 million, excluding interest and penalties. The Company disagrees with the NTA's assessment and believes the Company's position on this matter is more likely than not to be sustained. The Company plans to exhaust all available administrative remedies, and if unable to resolve this matter through administrative remedies with the NTA, the Company plans to pursue judicial remedies. The Company believes that it is likely that the NTA will request a payment of approximately $15 million in 2018 during the appeal process.

The Company believes that it has accrued adequate reserves related to all matters contained in tax periods open to examination. Should the Company experience an unfavorable outcome in the NTA matter; however, such an outcome could have a material impact on its financial statements.

Tax years 2013 through 2017 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under audit in any major taxing jurisdiction, except Norway.

The Company believes it is reasonably possible that the gross unrecognized tax benefits will decrease by approximately $1.8 million in the next 12 months due to the lapse of the statute of limitations applicable to tax deductions and tax credits claimed on prior year tax returns.