Income Taxes

6 Months Ended

Jul. 02, 2022

Income Taxes

Income Taxes

11. Income Taxes

Provision for income taxes includes both domestic and foreign income taxes at the applicable tax rates adjusted for non-deductible expenses, research and development tax credits and other permanent differences. Income tax expense was $11.0 million and $1.2 million for the three months ended July 2, 2022 and July 3, 2021, resulting in effective tax rates of 33.2% and (6.7)%, respectively. Income tax expense was $22.7 million and $3.2 million for the six months ended July 2, 2022 and July 3, 2021, resulting in effective tax rates of 33.5% and (7.8)%, respectively. The increase in the effective tax rate for the three and six months ended July 2, 2022 was primarily due to the application of FASB ASU 2019-12, Simplifying the Accounting for Income Taxes, to the three and six months ended July 3, 2021 and the required adoption of new U.S. tax rules regarding expensing of research and experimental costs in the current fiscal year.

Under ASU 2019-12, the income tax benefit of a loss from continuing operations should be recognized in discontinued operations if the Company would be unable to benefit from the loss without considering the income from discontinued operations. As such, tax benefits associated with losses incurred for the three and six months ended July 3, 2021 were recognized in discontinued operations.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Under the Act, research and experimental expenditures incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes, depending on where the research activities are conducted. The Company has elected to treat global intangible low-taxed income (GILTI) as a period cost so the capitalization of research and experimental costs in GILTI increases the Company’s provision for income taxes.

Uncertain Tax Positions

As of July 2, 2022, the Company had gross unrecognized tax benefits, inclusive of interest, of $4.3 million, all of which would affect the effective tax rate if recognized. During the six months ended July 2, 2022, the Company did not release any unrecognized tax benefits.

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 - 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 141.3 million Norwegian kroner, or $14.2 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.

Tax years 2015 through 2022 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 believes it is reasonably possible that its gross unrecognized tax benefits will decrease by approximately $0.5 million, inclusive of interest, in the next 12 months due to the lapse of the statute of limitations.