Income Taxes

9 Months Ended

Sep. 28, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s effective tax rate for the three and nine months ended September 28, 2019 was 14.5% and 10.5%, respectively. The variances from the 2019 federal statutory rate of 21% for the current period were attributable to the benefits of lower tax rates on foreign earnings and U.S. tax credits. These benefits were partially offset by the impacts of foreign earnings and deemed royalties taxed in the U.S. The Company’s effective tax rate also benefited from certain discrete items, primarily related to share-based compensation.

The Company’s effective tax rate for the three and nine months ended September 29, 2018 was 11.2% and 18.6%, respectively. The variances from the 2018 federal statutory rate of 21% for the prior period were attributable to the effect of lower tax rates in foreign jurisdictions and the generation of tax credits. These benefits were partially offset by increases related to foreign earnings subject to U.S. taxation, the U.S. impact of the acquisition of the Enterprise business of Motorola Solutions, Inc. and certain discrete items. The discrete items included the favorable impacts of share-based compensation, adjustments to the one-time transition tax related to the Tax Cuts and Jobs Act enacted in December 2017 (“U.S. Tax Reform” or “the Act”) offset by audit settlements with the U.S. Internal Revenue Service for fiscal years 2013, 2014, and 2015 and an increase in uncertain tax positions resulting from interpretative guidance issued during the second quarter of 2018.

For the three and nine months ended September 28, 2019, and September 29, 2018, foreign earnings taxed in the U.S. included the impacts of the Global Intangible Low-Taxed Income, the Deduction for Foreign-Derived Intangible Income, and the Base Erosion Anti-Avoidance Tax (“BEAT”) provisions of the U.S. Tax Reform. The Company has included the rate impacts of these provisions in its annual forecasted rate relying on all currently available guidance. It is anticipated that the U.S. Treasury will provide further guidance throughout the year.

Pre-tax earnings outside the U.S. are primarily generated in the United Kingdom, Singapore, and Luxembourg, with statutory rates of 19%, 17%, and 26%, respectively. During 2018, the Company applied for and was granted a second extension of its incentivized tax rate by the Singapore Economic Development Board. The incentive reduces the income tax rate to 10.5% from the statutory rate of 17% and is effective for calendar years 2019 to 2023. The Company has committed to making additional investments in Singapore over the period 2019 to 2022; should the Company not make these investments in accordance with the agreement, any incentive benefit would have to be repaid to the Singapore tax authorities.

The Company earns a significant amount of its operating income outside of the U.S. The Company’s policy considers its U.S. investments in directly-owned foreign affiliates to be indefinitely reinvested. As a result of U.S. Tax Reform, future remittance of dividends from foreign subsidiaries to the U.S. parent will generally no longer be subject to U.S. tax when repatriated but may be subject to withholding taxes of the payor affiliate country. Additionally, gains and losses on taxable dispositions of U.S.-owned foreign affiliates continue to be subject to U.S. tax.

Quarterly, management evaluates all jurisdictions based on historical pre-tax earnings and taxable income to determine the need for valuation allowances. Based on this analysis, a valuation allowance has been recorded for any jurisdictions where, in the Company’s judgment, tax benefits are not expected to be realized.

Uncertain Tax Positions

The Company is currently undergoing U.S. federal income tax audits for the tax years 2016 and 2017, as well as a UK income tax audit for fiscal years 2012 through 2014, and 2016. Fiscal years 2004 through 2018 remain open to examination by multiple foreign and U.S. state taxing jurisdictions. Subsequent to September 28, 2019, the Company settled a tax dispute for $19 million. The settlement was reflected in Current liabilities within the Company’s Consolidated Balance Sheets. The settlement did not have a significant impact to the current quarter’s Income tax expense. No other significant uncertain tax positions are expected to be settled within the next twelve months. Due to uncertainties in any tax audit or litigation outcome, the Company’s estimates of the ultimate settlement of other uncertain tax positions may change and the actual tax benefits may differ significantly from the estimates.