Income Taxes

12 Months Ended

Dec. 28, 2019

Income Taxes

Income Taxes

17. Income Taxes

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

	Year Ended
	December 28,		December 29,		December 30,
	2019		2018		2017
Domestic	$	2,025	$	19,777	$	9,700
Foreign		47,624		52,384		67,203
	$	49,649	$	72,161	$	76,903

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

	Year Ended
	December 28,		December 29,		December 30,
	2019		2018		2017
Current:
Domestic	$	(779)	$	(8,843)	$	48,947
Foreign		8,157		5,888		7,077
Total Current		7,378		(2,955)		56,024
Deferred:
Domestic		33,624		(8,978)		(25,760)
Foreign		(10,618)		503		(453)
Total Deferred		23,006		(8,475)		(26,213)
Provision (benefit) for income taxes	$	30,384	$	(11,430)	$	29,811

17. Income Taxes (Continued)

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

	Year Ended
	December 28,		December 29,		December 30,
	2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	35.0	%
Foreign tax rate benefit	(13.8)		(12.9)		(25.4)
Research and development tax credits	(15.2)		(9.8)		(4.5)
GILTI and Subpart F income	5.8		4.3		1.4
Nondeductible (nontaxable) foreign expenses	3.9		3.9		1.1
State tax expense	1.0		1.5		0.9
Release of prior year unrecognized tax benefits	(0.4)		(2.7)		(0.6)
Nondeductible officer compensation	4.3		2.4		1.5
Other tax effects of equity compensation	0.8		(0.4)		(2.2)
Change in cost-sharing treatment of stock-based compensation	54.8		(2.2)		5.2
Excess tax benefit of stock-based compensation	(2.2)		(5.9)		(5.6)
Change in prior period valuation allowance	1.3		(2.5)		(1.3)
Transition tax on unremitted foreign earnings	—		(8.4)		70.8
Revaluation of deferred tax balances	—		0.3		28.2
Other deferred tax impacts of tax reform	(0.5)		(3.1)		(64.8)
Other	0.4		(1.3)		(0.9)
Effective Tax Rate	61.2	%	(15.8)	%	38.8	%

The effective tax rate for fiscal 2019 increased from fiscal 2018 primarily due to a change in the Company's financial statement position related to the treatment of stock-based compensation within its intercompany cost-sharing arrangement.

The effective tax rate for fiscal 2018 decreased from fiscal 2017 primarily due to the reduction in the U.S. federal statutory rate as well as the inclusion of one-time tax impacts recorded in 2017 from the enactment of the Tax Cuts and Jobs Act ("the Act"). This decrease in the effective tax rate was offset by a decrease in the Company’s foreign tax rate benefit.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner which concluded that related parties in an intercompany cost-sharing arrangement are not required to share costs related to stock-based compensation. In February 2016, the U.S. Internal Revenue Service appealed the decision to the U.S Court of Appeals for the Ninth Circuit (the “Ninth Circuit”). On June 7, 2019, the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court. As a result of this decision, the Company no longer reflects a tax benefit related to the removal of stock-based compensation from its intercompany cost-sharing arrangement within its financial statements. During the three months ended June 29, 2019, the Company removed the deferred tax assets and a deferred tax liability associated with this matter from its financial statements. This removal resulted in a full year discrete income tax expense of $27.2 million. On November 12, 2019, the Ninth Circuit denied a petition for rehearing the case en banc. The Company will continue to monitor ongoing developments in this matter and potential impacts to its financial statements.

The Company’s operations in Singapore are subject to reduced tax rates through June 30, 2024, as long as certain conditions are met. Without the impact of a one-time transition tax, the income tax benefit from the reduced Singapore tax rate reflected in earnings was approximately $1.5 million (representing $0.03 per diluted share) in fiscal 2019, $5.4 million (representing $0.12 per diluted share) in fiscal 2018 and approximately $11.0 million (representing $0.25 per diluted share) in fiscal 2017.

The Act was enacted in the U.S. on December 22, 2017 and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred from U.S income tax under U.S. tax law. The Company elected to pay the transition tax over the eight-year period provided in the Act. As of December 28, 2019, the unpaid balance of its transition tax obligation is $21.3 million, which is payable between April 2022 and April 2025.

17. Income Taxes (Continued)

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 28, 2019 and December 29, 2018 are as follows (in thousands):

	December 28,		December 29,
	2019		2018
Deferred tax assets:
Net operating loss carryforwards	$	7,912	$	9,973
Research and development tax credit carryforwards		14,755		12,500
Stock-based compensation		2,619		4,360
Depreciation and amortization		7,424		7,799
Capitalized research and development		1,735		2,521
Deferred income on shipments to distributors		4,018		5,824
Expected future cost-sharing adjustment		—		25,257
Leases		3,446		—
Accrued liabilities and other		7,374		7,737
		49,283		75,971
Less: Valuation allowance		(4,486)		(4,975)
		44,797		70,996
Deferred tax liabilities:
Acquired intangible assets		16,621		20,656
Depreciation and amortization		4,969		4,604
Leases		3,166		—
Long-term debt		5,741		8,080
Prepaid expenses and other		2,424		2,142
		32,921		35,482
Net deferred tax assets	$	11,876	$	35,514

As of December 28, 2019, the Company had federal net operating loss and research and development tax credit carryforwards of approximately $27.9 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. Additionally, as of December 28, 2019, the Company had generated $3.3 million of federal research and development credit carryforwards. These credits expire in 2039 and are not currently subject to an annual limitation.

The Company also had state loss, state tentative minimum tax credit, and state research and development tax credit carryforwards of approximately $33.1 million, $0.1 million, and $12.6 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 and Zentri acquisitions. Certain of these carryforwards expire in fiscal years 2024 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. The Company maintains a valuation allowance with respect to certain deferred tax assets relating to state research and development tax credit and state net operating loss carryforwards.

17. Income Taxes (Continued)

The following table summarizes the activity related to the valuation allowance for deferred tax assets (in thousands):

	Balance at		Additions		Additions
	Beginning of		Charged to		Charged to				Balance at
	Period		Expenses		Other Accounts		Deductions		End of Period
Year ended December 28, 2019	$	4,975	$	1,044	$	—	$	(1,533)	$	4,486
Year ended December 29, 2018	$	6,518	$	435	$	—	$	(1,978)	$	4,975
Year ended December 30, 2017	$	12,361	$	2,110	$	1,732	$	(9,685)	$	6,518

At the end of fiscal 2019, undistributed earnings of certain of the Company's foreign subsidiaries of approximately $71.5 million are intended to be permanently reinvested outside the U.S. Accordingly, no provision for foreign withholding tax and state income taxes associated with a distribution of these earnings has been made. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable.

Uncertain Tax Positions

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

	Year Ended
	December 28,		December 29,		December 30,
	2019		2018		2017
Beginning balance	$	2,036	$	3,187	$	3,054
Additions based on tax positions related to current year		436		630		456
Additions based on tax positions related to prior years		—		115		114
Reductions based on tax positions related to prior years		(196)		—		—
Reductions for tax positions as a result of a lapse of the applicable statute of limitations		—		(1,896)		(437)
Ending balance	$	2,276	$	2,036	$	3,187

As of December 28, 2019, December 29, 2018 and December 30, 2017, the Company had gross unrecognized tax benefits, inclusive of interest, of $2.4 million, $2.1 million and $3.2 million, respectively, of which $1.9 million, $2.1 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 any of the periods presented.

Following the completion of the Norwegian Tax Administration (“NTA”) examination of the Company’s Norwegian subsidiary for income tax matters relating to fiscal years 2013, 2014, 2015 and 2016, the Company received an assessment from the NTA in December 2017 concerning an adjustment to its 2013 taxable income related to the pricing of an intercompany transaction. The Company is currently appealing the assessment. The adjustment to the pricing of the intercompany transaction results in approximately $16.0 million additional Norwegian income tax. 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 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.

17. Income Taxes (Continued)

Tax years 2015 through 2019 remain open to examination by the major taxing jurisdictions in which the Company operates. The Company is not currently under audit in any major taxing jurisdiction.

The Company does not believe gross unrecognized tax benefits will decrease in the next 12 months.