INCOME TAXES

On December 22, 2017, the U.S. enacted the Tax Act which significantly changed U.S. tax law. The Tax Act lowered our U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018, while also imposing a deemed repatriation tax on deferred foreign income. The Tax Act also created a new minimum “base erosion and anti-abuse tax” on certain foreign payments made by a U.S. parent company, and the “global intangible low-taxed income” rules which tax foreign subsidiary income earned over a 10% rate of routine return on tangible business assets.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, which allows the Company to record provisional amounts for the Tax Act during a measurement period not to extend beyond one year of the enactment date. As a result, in 2017, we have previously provided a reasonable estimate of the effects of the Tax Act in our financial statements. During the quarter ended December 30, 2018, we completed our analysis based on legislative updates currently available and reported the changes to the provisional amounts previously recorded. We also confirmed that the Tax Act does not impact our expectations of actual cash payments for income taxes in the foreseeable future.

In the year ended December 30, 2018, our income tax provision of $1.0 million on a loss before income taxes and equity in earnings of unconsolidated investees of $898.7 million was primarily due to the related tax expense in foreign jurisdictions that were profitable, offset by tax benefit related to release of valuation allowance in a foreign jurisdiction and release of tax reserve due to lapse of statutes of limitation. The income tax benefit of $3.9 million in the year ended December 31, 2017 on a loss before income taxes and equity in earnings of unconsolidated investees of $1,200.8 million, was primarily due to the related tax effects of the carryback of fiscal 2016 net operating losses to fiscal 2015 domestic tax returns, partially offset by tax expense in profitable jurisdictions.

The geographic distribution of income (loss) from continuing operations before income taxes and equity earnings (losses) of unconsolidated investees and the components of provision for income taxes are summarized below:



	Fiscal Year
(In thousands)	2018			2017			2016
Geographic distribution of income (loss) from continuing operations before income taxes and equity in earnings of unconsolidated investees:
U.S. income (loss)	$	(778,316	)	$	(1,242,000	)	$	(660,029	)
Non-U.S. income (loss)	(120,355		)	41,250			131,637
Income (loss) before income taxes and equity in earnings (loss) of unconsolidated investees	$	(898,671	)	$	(1,200,750	)	$	(528,392	)
Provision for income taxes:
Current tax benefit (expense)
Federal	$	(1,155	)	$	6,816		$	(6,842	)
State	(553		)	6,575			9,254
Foreign	(4,100		)	(12,074		)	(19,073		)
Total current tax expense	(5,808		)	1,317			(16,661		)
Deferred tax benefit (expense)
Federal				—			3,286
State	—			1,450			6,819
Foreign	4,798			1,177			(762		)
Total deferred tax benefit (expense)	4,798			2,627			9,343
Benefit from (provision for) income taxes	$	(1,010	)	$	3,944		$	(7,318	)

The benefit from (provision for) for income taxes differs from the amounts obtained by applying the statutory U.S. federal tax rate to income before taxes as shown below:



	Fiscal Year
(In thousands)	2018			2017			2016
Statutory rate	21		%	35		%	35		%
Tax benefit (expense) at U.S. statutory rate	$	188,721		$	420,263		$	184,891
Foreign rate differential	(28,376		)	6,178			24,932
State income taxes, net of benefit	(450		)	(450		)	(329		)
Return to provision adjustments	—			—			10,784
Tax credits (investment tax credit and other)	4,727			8,132			6,396
Change in valuation allowance	(105,363		)	(143,804		)	(178,231		)
Unrecognized tax benefits	2,345			2,430			(42,697		)
Non-controlling interest income	(22,763		)	17,705			17,183
Global intangible low-taxed income (“GILTI”)	(36,455		)	—			—
Goodwill impairment	—			—			(20,236		)
Intercompany profit deferral	—			—			(4,933		)
Effects of tax reform	—			(302,899		)	—
Other, net	(3,396		)	(3,611		)	(5,078		)
Total	$	(1,010	)	$	3,944		$	(7,318	)



	As of
(In thousands)	December 30, 2018			December 31, 2017
Deferred tax assets:
Net operating loss carryforwards	$	225,489		$	160,778
Tax credit carryforwards	55,527			57,072
Reserves and accruals	241,194			194,566
Stock-based compensation stock deductions	9,316			11,160
Basis difference on third-party project sales	50,648			242,290
Other	2,081			2,410
Total deferred tax assets	584,255			668,276
Valuation allowance	(404,923		)	(448,723		)
Total deferred tax assets, net of valuation allowance	179,332			219,553
Deferred tax liabilities:
Outside basis difference on investment in 8point3 Energy Partners	—			(53,460		)
Other intangible assets and accruals	—			(8,257		)
Fixed asset basis difference	(151,192		)	(140,939		)
Other	(14,882		)	(8,252		)
Total deferred tax liabilities	(166,074		)	(210,908		)
Net deferred tax asset	$	13,258		$	8,645

As of December 30, 2018, we had federal net operating loss carryforwards of $779.9 million for tax purposes; of which, $81.6 million was generated in fiscal year 2018 and can be carried forward indefinitely under the Tax Cuts and Job Acts of 2017 (“The Tax Act”). The remaining federal net operating loss carry forward of $698.3 million, which were generated prior to 2018, will expire at various dates from 2031 to 2037. As of December 30, 2018, we had California state net operating loss carryforwards of approximately $777.7 million for tax purposes, of which $5.2 million relate to debt issuance and will benefit equity when realized. These California net operating loss carryforwards will expire at various dates from 2029 to 2038. We also had credit carryforwards of approximately $73.9 million for federal tax purposes, of which $19.2 million relate to debt issuance and will benefit equity when realized. We had California credit carryforwards of $9.0 million for state tax purposes, of which $4.7 million relate to debt issuance and will benefit equity when realized. These federal credit carryforwards will expire at various dates from 2019 to 2038, and the California credit carryforwards do not expire. Our ability to utilize a portion of the net operating loss and credit carryforwards is dependent upon our being able to generate taxable income in future periods or being able to carryback net operating losses to prior year tax returns. Our ability to utilize net operating losses may be limited due to restrictions imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a change in ownership.

We are subject to tax holidays in the Philippines where we manufacture our solar power products. Our current income tax holidays were granted as manufacturing lines were placed in service. Tax holidays in the Philippines reduce our tax rate to 0% from 30% (through July 2019). Tax savings associated with the Philippines tax holidays were approximately $3.4 million, $5.6 million and $10.0 million in fiscal years 2018, 2017 and 2016, respectively, which provided a diluted net income (loss) per share benefit of $0.02, $0.04 and $0.07, respectively.

We qualify for the auxiliary company status in Switzerland where we sell our solar power products. The auxiliary company status entitles us to a reduced tax rate of 11.5% in Switzerland from approximately 24.2%. Tax savings associated with this ruling were approximately $1.8 million, $2.4 million and $1.9 million in fiscal years 2018, 2017 and 2016, respectively, which provided a diluted net income (loss) per share benefit of $0.01, $0.02 and $0.01, respectively.

We are subject to tax holidays in Malaysia where we manufacture our solar power products. Our current tax holidays in Malaysia were granted to its former joint venture AUOSP (now a wholly-owned subsidiary). Tax holidays in Malaysia reduce our tax rate to 0% from 24%. Tax savings associated with the Malaysia tax holiday were approximately $7.6 million, $6.8 million, and $2.0 million in fiscal 2018, 2017, and 2016, respectively, which provided a diluted net income (loss) per share benefit of $0.05, $0.05, and $0.01, respectively.

Valuation Allowance

Our valuation allowance is related to deferred tax assets in the United States, Malta, South Africa and Spain and was determined by assessing both positive and negative evidence. When determining whether it is more likely than not that deferred assets are recoverable, with such assessment being required on a jurisdiction by jurisdiction basis, we believe that sufficient uncertainty exists with regard to the realizability of these assets such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits, the lack of consistent profitability in the solar industry, the limited capacity of carrybacks to realize these assets, and other factors. Based on the absence of sufficient positive objective evidence, we are unable to assert that it is more likely than not that we will generate sufficient taxable income to realize net deferred tax assets aside from the U.S. net operating losses that can be carried back to prior year tax returns. Should we achieve a certain level of profitability in the future, we may be in a position to reverse the valuation allowance which would result in a non-cash income statement benefit. The change in valuation allowance for fiscal 2018, 2017 and 2016 was $43.8 million, $151.2 million and $214.2 million, respectively.

Unrecognized Tax Benefits

Current accounting guidance contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits during fiscal 2018, 2017, and 2016 is as follows:



	Fiscal Year
(In thousands)	2018			2017			2016
Balance, beginning of year	$	105,959		$	82,253		$	41,058
Additions for tax positions related to the current year	2,404			2,478			35,768
Additions for tax positions from prior years	451			22,151			7,322
Reductions for tax positions from prior years/statute of limitations expirations	(2,468		)	(1,460		)	(2,063		)
Foreign exchange (gain) loss	(2,462		)	537			168
Balance at the end of the period	$	103,884		$	105,959		$	82,253

Included in the unrecognized tax benefits at fiscal 2018 and 2017 is $14.7 million and $17.6 million, respectively, that if recognized, would result in a reduction of our effective tax rate. The amounts differ from the long-term liability recorded of $16.8 million and $19.4 million as of fiscal 2018 and 2017, respectively, due to accrued interest and penalties. Certain components of the unrecognized tax benefits are recorded against deferred tax asset balances.

We believe that events that could occur in the next 12 months and cause a change in unrecognized tax benefits include, but are not limited to, the following:


•	commencement, continuation or completion of examinations of our tax returns by the U.S. or foreign taxing authorities; and


•	expiration of statutes of limitation on our tax returns.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Uncertainties include, but are not limited to, the impact of legislative, regulatory and judicial developments, transfer pricing and the application of withholding taxes. We regularly assess our tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which we do business. We determined that an estimate of the range of reasonably possible change in the amounts of unrecognized tax benefits within the next 12 months cannot be made.

Classification of Interests and Penalties

We accrue interest and penalties on tax contingencies which are classified as "Provision for income taxes" in our Consolidated Statements of Operations. Accrued interest as of December 30, 2018 and December 31, 2017 was approximately $2.1 million and $1.8 million, respectively. Accrued penalties were not material for any of the periods presented.

Tax Years and Examination

We file tax returns in each jurisdiction in which we are registered to do business. In the United States and many of the state jurisdictions, and in many foreign countries in which we file tax returns, a statute of limitations period exists. After a statute of limitations period expires, the respective tax authorities may no longer assess additional income tax for the expired period. Similarly, we are no longer eligible to file claims for refund for any tax that we may have overpaid. The following table summarizes our major tax jurisdictions and the tax years that remain subject to examination by these jurisdictions as of December 30, 2018:



Tax Jurisdictions	Tax Years
United States	2010 and onward
California	2011 and onward
Switzerland	2013 and onward
Philippines	2009 and onward
France	2015 and onward
Italy	2014 and onward

Additionally, certain pre-2010 U.S. corporate tax returns and pre-2011 California tax returns are not open for assessment but the tax authorities can adjust net operating loss and credit carryovers that were generated.

We are under tax examinations in various jurisdictions. We do not expect the examinations to result in a material assessment outside of existing reserves. If a material assessment in excess of current reserves results, the amount that the assessment exceeds current reserves will be a current period charge to earnings.