Income Taxes

12 Months Ended

Jan. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company's regional income before income taxes and equity in net gains (losses) of equity method investments was as follows:

	Fiscal Year Ended
(in thousands)	January 30, 2022		January 31, 2021		January 26, 2020
Domestic	$	(16,593)	$	(26,170)	$	(24,530)
Foreign	155,662		89,145		69,115
Total	$	139,069	$	62,975	$	44,585

The provision for income taxes consisted of the following:

	Fiscal Year Ended
(in thousands)	January 30, 2022		January 31, 2021		January 26, 2020
Current income tax provision (benefit)
Federal	$	1,078	$	6,716	$	6,463
State	211		(69)		100
Foreign	16,374		4,801		11,861
Subtotal	17,663		11,448		18,424
Deferred income tax provision (benefit)
Federal	(1,797)		(7,012)		74
State	—		20		(33)
Foreign	(327)		(1,019)		(5,637)
Subtotal	(2,124)		(8,011)		(5,596)
Provision for income taxes	$	15,539	$	3,437	$	12,828

The provision for income taxes reconciles to the amount computed by applying the statutory federal rate to income before taxes as follows:

	Fiscal Year Ended
(in thousands)	January 30, 2022		January 31, 2021		January 26, 2020
Federal income tax at statutory rate	$	29,194	$	13,309	$	9,328
State income taxes, net of federal benefit	272		(186)		68
Foreign taxes differential, including withholding taxes	(6,611)		(2,688)		(966)
Tax credits generated	(9,008)		(4,361)		(2,026)
Changes in valuation allowance	1,778		(438)		(2,722)
Gain on intra-entity asset transfer	—		—		6,802
Changes in uncertain tax positions	180		1,841		8,636
Equity compensation	(2,698)		(3,573)		(6,008)
GILTI and Subpart F income	441		270		538
Impact of U.S. tax reform	—		—		—
Other	1,991		(737)		(822)
Provision for income taxes	$	15,539	$	3,437	$	12,828

The Company’s tax expense benefited from its operations in lower tax jurisdictions such as Switzerland, research tax credits and the recognition of excess tax benefits related to share-based compensation.

On December 6, 2016, the Company was granted a tax holiday ("Tax Holiday") with an effective date of January 30, 2017. The Tax Holiday provides Semtech (International) AG with a 70% reduction to the Swiss Cantonal tax rate, bringing the statutory Swiss Cantonal tax rate down from 12.56% to 3.77%. The maximum benefit under this Tax Holiday is CHF 500.0 million of cumulative after tax profit, which equates to a maximum potential tax savings of CHF 44.0 million. The Tax Holiday was effective for five years and could be extended for an additional five years if the Company met certain staffing targets by January 30, 2022. Semtech (International) AG has met these staffing guidelines, and therefore, the tax holiday is extended for an additional 5 years ending January 31, 2027.

On May 19, 2019, Switzerland approved the Federal Act on Tax Reform ("Swiss Tax Reform"). One main component of the Swiss Tax Reform included reduction of Cantonal income tax rates. The Swiss Tax Reform dropped the statutory Swiss Cantonal tax rate down from 12.56% to 8.46%. Semtech’s Tax Holiday provides Semtech (International) AG with a 70% reduction to this new Swiss Cantonal tax rate, bringing the statutory Swiss Cantonal tax rate down from 8.46% to 2.54%. All other provisions of the existing Tax Holiday discussed above still apply.

The Tax Act imposed a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. stockholder. In accordance with guidance issued by the FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred.

Prior to the enactment of the Tax Act, with few exceptions, U.S. federal income and foreign withholding taxes had not been provided on the excess of the amount for financial reporting over the tax basis of investments in the Company’s foreign subsidiaries that were essentially permanent in duration. With the enactment of the Tax Act, all historic and current foreign earnings are taxed in the U.S. Depending on the jurisdiction, these foreign earnings are potentially subject to a withholding tax, if repatriated. As of January 30, 2022, our historical undistributed earnings of the Company’s foreign subsidiaries are intended to be permanently reinvested outside of the U.S.

Notwithstanding the U.S. taxation of these amounts, we have determined that $50.0 million of our current foreign earnings will not be permanently reinvested. As a result, we have established a deferred income tax liability for the Swiss withholding tax that will be due upon distribution of these earnings. If we needed to remit all or a portion of our historical undistributed earnings to the U.S. for investment in our domestic operations, any such remittance could result in increased tax liabilities and a higher effective tax rate. Determination of the amount of the unrecognized deferred tax liability on these unremitted earnings is not practicable.

The components of the net deferred income tax assets and liabilities at January 30, 2022 and January 31, 2021 were as follows:

(in thousands)	January 30, 2022		January 31, 2021
Non-current deferred tax assets:
Inventory reserve	$	5,734	$	4,435
Bad debt reserve	26		23
Foreign tax credits	3,304		1,974
Research credit carryforward	13,498		9,700
NOL carryforward	7,839		7,659
Payroll and related accruals	11,743		10,248
Share-based compensation	5,256		5,822
Foreign pension deferred	1,412		2,020
Accrued sales reserves	1,012		464
Research and development charges	7,263		4,005
Goodwill and other intangibles	—		690
Leasing deferred assets	4,311		3,573
Other deferred assets	2,239		3,253
Valuation allowance	(17,506)		(15,751)
Total non-current deferred tax assets	46,131		38,115
Non-current deferred tax liabilities:
Goodwill and other intangibles	(1,530)		—
Property, plant and equipment	(6,990)		(6,820)
Repatriation of foreign earnings	(4,709)		(2,538)
Leasing deferred liabilities	(4,139)		(3,415)
Other non-current deferred tax liabilities	(2,093)		(835)
Total non-current deferred tax liabilities	(19,461)		(13,608)
Net deferred tax assets	$	26,670	$	24,507

As of January 30, 2022, the Company had U.S. state net operating loss carryforwards of $103.5 million, which, subject to certain limitations, are available to offset future taxable income through fiscal year 2042.

As of January 30, 2022, the Company had U.S. gross federal and state research credits available of approximately $13.3 million and $15.7 million, respectively, which are available to offset taxable income. These credits will expire between fiscal years 2029 through 2042. The Company also had gross Canadian research credits available of approximately $6.7 million. These credits will expire by fiscal year 2042.

As of January 30, 2022 and January 31, 2021, the Company had approximately $44.1 million and $40.3 million of net deferred tax assets, respectively, the majority of which are in the U.S. and Canada. The Company has recorded valuation allowances of $17.5 million and $15.8 million against its deferred tax assets at January 30, 2022 and January 31, 2021, respectively, based on the Company's assessment of its ability to utilize its deferred tax assets. The valuation allowances established relate to certain U.S. deferred tax assets, for which the Company has determined that it is more likely than not that a benefit will not be realized. In considering whether a valuation allowance was required for the Company's U.S. deferred income tax assets, the Company considered all available positive and negative evidence. Positive evidence considered included reversing taxable temporary differences. Negative evidence considered included the cumulative pre-tax losses in the U.S. recorded during the three-year period ended January 30, 2022, on both an annual and cumulative basis.

Changes in the valuation allowance for the three years ended January 30, 2022 are summarized in the table below:

	Fiscal Year Ended
(in thousands)	January 30, 2022		January 31, 2021		January 26, 2020
Beginning balance	$	15,751	$	16,189	$	18,912
Additions	2,605		1,208		159
Releases	(850)		(1,646)		(2,882)
Ending balance	$	17,506	$	15,751	$	16,189

Uncertain Tax Positions

The Company uses a two-step approach to recognize and measure uncertain tax positions ("UTP"). 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 amount of gross unrecognized tax benefits (before federal impact of state items) is as follows:

	Fiscal Year Ended
(in thousands)	January 30, 2022		January 31, 2021
Beginning balance	$	26,850	$	25,466
Net additions based on tax positions related to the current year	925		400
Additions based on tax positions related to prior years	464		2,760
Reductions as a result of lapsed statutes	(991)		(261)
Reductions for settlements with tax authorities	(197)		(1,515)
Ending balance	$	27,051	$	26,850

Included in the balance of gross unrecognized tax benefits at January 30, 2022 and January 31, 2021, are $9.3 million and $9.7 million, respectively, of net tax benefits (after federal impact of state items) that, if recognized, would impact the effective tax rate.

The liability for UTP is reflected on the Balance Sheets as follows:

	Fiscal Year Ended
(in thousands)	January 30, 2022		January 31, 2021
Deferred tax assets - non-current	$	16,346	$	15,770
Other long-term liabilities	9,335		9,731
Total accrued taxes	$	25,681	$	25,501

The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes in the Statements of Income. The Company had approximately $1.3 million of net interest and penalties accrued at January 30, 2022.

Tax years prior to 2013 (the Company’s fiscal year 2014) are generally not subject to examination by the IRS except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. For state returns in the U.S., the Company is generally not subject to income tax examinations for years prior to 2012 (the Company’s fiscal year 2013). The Company has a significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2020. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax examinations cannot be predicted with certainty. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.