Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Tax Act Enacted in 2017

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate income tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on accumulated earnings of foreign subsidiaries; (3) implementing a modified territorial tax system and how foreign earnings are subject to U.S. tax; (4) capitalizing specific R&D expenses which are amortized over five to 15 years; and (5) eliminating the domestic manufacturing deduction.

Consistent with applicable Securities and Exchange Commission (“SEC”) guidance, we made a reasonable estimate of the accounting impact of the Tax Act. We recorded a total provisional amount of $121.4 million in our fiscal 2018 income tax provision as follows:

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Remeasurement of net deferred tax assets: The Tax Act reduces the corporate tax rate from 35 percent to 21 percent, which results in an estimated net decrease of $49.6 million in our net deferred tax asset balance. While we are able to make a reasonable estimate of the impact of the reduced corporate tax rate on our net deferred tax asset balances, our deferred taxes may be affected by changes in our interpretations and assumptions, as well as additional guidance on the interpretation of the Tax Act.

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Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax ("Transition Tax") is a one time tax on the accumulated earnings of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 earnings and profits of the relevant subsidiaries as of December 31, 2017, as well as the amount of foreign income taxes paid on such earnings and profits. The portion of earnings and profits comprised of cash and other specified assets is taxed at a rate of 15.5 percent and any remaining amount of earnings and profits is taxed at a rate of eight percent. We made a reasonable estimate of the Transition Tax and recorded a liability for a provisional Transition Tax obligation of $71.8 million which the Tax Act allows us to pay in installments over a period of eight years. This provisional estimate will be updated when additional information regarding our accumulated earnings and profit and non-U.S. income taxes paid becomes available.

Other significant provisions that are effective beginning in our fiscal year 2019 include: a modified territorial tax system, an incremental tax on excessive payments to foreign related parties, and a minimum tax on certain low taxed foreign earnings ("minimum foreign tax"). Under GAAP, we are allowed to make an accounting policy election to either (1) treat the future taxes due as a current period expense or (2) factor such amounts into our measurement of deferred taxes. We have yet to make the policy election, therefore its impact has not been reflected in our fiscal year 2018 financial statements.

The final transitional impacts of the Tax Act may differ from our current estimate, due to, among other things, changes in interpretations of the Tax Act, any legislative actions to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, and any updates or changes to estimates we have utilized to calculate the transition impacts. The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. We currently anticipate finalizing and recording any resulting adjustments by the end of our quarter ending December 28, 2018.

Income Tax Provision

The following two tables present the components of our income before provision for income taxes by geographic region and the portion of our provision for income taxes classified as current and deferred (in thousands):



	Fiscal Year Ended
	September 28, 2018		September 29, 2017		September 30, 2016
United States	$	75,689	$	28,221	$	37,223
Foreign	237,178		228,423		198,681
Total	$	312,867	$	256,644	$	235,904



	Fiscal Year Ended
	September 28, 2018			September 29, 2017			September 30, 2016
Current:
Federal	$	40,624		$	30,719		$	19,226
State	333			610			521
Foreign	59,383			55,531			52,492
Total current	100,340			86,860			72,239

Deferred:
Federal	71,988			(27,345		)	(19,540		)
State	18,243			(4,596		)	(3,451		)
Foreign	(509		)	(702		)	254
Total deferred	89,722			(32,643		)	(22,737		)
Provision for income taxes	$	190,062		$	54,217		$	49,502

Repatriation of Undistributed Foreign Earnings

As a result of the Tax Act, foreign accumulated earnings that were subject to the mandatory Transition Tax as of December 31, 2017, can be repatriated to the U.S. without incurring further U.S. federal tax. The Tax Act moves towards a modified territorial tax system through the provision of a 100% dividend received deduction for the foreign-source portions of dividends received from controlled foreign subsidiaries. As a result, we continue to evaluate the indefinite reinvestment assertions with regards to unremitted earnings for certain of our foreign subsidiaries. During the fiscal year, we repatriated $450 million of foreign subsidiary earnings which were exempt from foreign withholding tax. Future repatriation of cash and other property held by our foreign subsidiaries will generally not be subject to U.S. federal tax. As of September 28, 2018, the total undistributed earnings of our non-U.S. subsidiaries were approximately $526 million. Historically, we have asserted our intention to indefinitely reinvest a portion of the undistributed earnings of certain foreign subsidiaries. However, we have reevaluated our historical assertion as a result of the Tax Act and determined that we no longer consider a vast majority of these earnings to be indefinitely reinvested. As such, we have recorded an immaterial provisional estimate of U.S. state income tax liability on those undistributed foreign earnings. The unrecognized deferred tax liability on the portion of the undistributed earnings considered indefinitely reinvested is not material.

Withholding Taxes

We recognize licensing revenue gross of withholding taxes, which our licensees remit directly to their local tax authorities, and for which we receive a partial foreign tax credit in our income tax provision. The foreign current tax provision includes this withholding tax expense while the appropriate foreign tax credit benefit is included in current federal and foreign tax provision. Withholding taxes were as follows (in thousands):



	Fiscal Year Ended
	September 28, 2018		September 29, 2017		September 30, 2016
Withholding taxes	$	50,313	$	48,012	$	45,151

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. A summary of the tax effects of the temporary differences were as follows (in thousands):



	Fiscal Year Ended
	September 28, 2018			September 29, 2017
Deferred income tax assets:
Investments	$	2,215		$	2,327
Inventories	4,070			6,821
Net operating loss	2,174			2,806
Accrued expenses	12,573			19,732
Stock-based compensation	15,601			26,970
Revenue recognition	33,464			53,843
Depreciation and amortization	16,078			52,876
Research and development credits	21,302			15,504
Foreign tax credits	9,345			10,140
Translation adjustment	—			625
Other	3,335			6,696
Total gross deferred income tax assets	120,157			198,340
Less: valuation allowance	(16,256		)	—
Total deferred income tax assets	103,901			198,340

Deferred income tax liabilities:
Intangibles	(2,831		)	(2,277		)
International earnings	—			(4,855		)
Unrealized gain on investments	—			(293		)
Deferred income tax assets, net (non-current)	$	101,070		$	190,915

NOL and Tax Credit Carryforwards

At September 28, 2018, the NOL carried forward for California tax purposes was $5.8 million and will expire in fiscal 2029 if unused. Additionally, we had total foreign NOL carryforwards of $8.6 million as of September 28, 2018, an amount which is not subject to expiration. At September 28, 2018, we also had foreign tax credit and federal R&D tax credit carryforwards of $6.9 million and $4.9 million, respectively, which will expire between fiscal 2025 and fiscal 2035, and California and foreign R&D tax credits of $24.1 million and $1.8 million, respectively, which will be carried forward indefinitely.

Establishment of Valuation Allowance

In fiscal 2018, a $16.3 million valuation allowance was established for California R&D credit carryforwards for which ultimate realization of its future benefits is uncertain.

Effective Tax Rate

Each period, the combination of multiple different factors can impact our effective tax rate. These factors include both recurring items such as tax rates and the relative amount of income earned in foreign jurisdictions, as well as discrete items that may occur in, but are not necessarily consistent between periods. The benefit associated with the foreign rate differential shown below is net of the impact of uncertain tax positions affecting the amount of income subject to foreign taxation. A reconciliation of the federal statutory tax rate to our effective tax rate on income from continuing operations was as follows:



	Fiscal Year Ended
	September 28, 2018		September 29, 2017		September 30, 2016
Federal statutory rate	24.6	%	35.0	%	35.0	%
State income taxes, net of federal effect	0.7		0.7		0.7
Stock-based compensation expense rate	(3.2	)	1.4		1.5
Research and development tax credits	(2.8	)	(3.7	)	(5.2	)
Tax exempt interest	—		(0.1	)	(0.1	)
U.S. manufacturing tax incentives	(0.2	)	(0.8	)	(1.1	)
Foreign rate differential	(3.9	)	(11.7	)	(9.5	)
Audit settlements	—		(0.6	)	(2.3	)
Tax Act	38.8		—		—
Establishment of Valuation Allowance	5.2		—		—
Other	1.5		0.9		2.0
Effective tax rate	60.7	%	21.1	%	21.0	%

Our effective tax rate was 60.7% in fiscal 2018, compared with our blended federal statutory rate of 24.6% (as a result of the change from 35% to 21% during the year), and with our effective tax rate in fiscal 2017 of 21.1%. The increase in our effective tax rate reflects the impact from the Tax Act, most notably the remeasurement of net deferred tax assets and the Transition Tax on the accumulated earnings of our foreign subsidiaries, the establishment of a valuation allowance against California tax credits, and reduced by excess benefit related to stock-based awards.

Our effective tax rate was 21.0% in fiscal 2016 and was 21.1% in fiscal 2017. The effective tax rate in fiscal 2017 compared to fiscal 2016 reflects a benefit from a higher proportion of our overall earnings being attributable to lower tax-rate jurisdictions, offset by reduced benefits from both federal R&D tax credits and lower settlements from prior years' state audits.

Uncertain Tax Positions

As of September 28, 2018, the total amount of gross unrecognized tax benefits was $102.0 million, of which $96.9 million, if recognized, would reduce our effective tax rate. Our liability for unrecognized tax benefits is classified within other non-current liabilities in our consolidated balance sheets. Over the next twelve months, we estimate that this amount will be reduced by $1.9 million as a result of the expiration of certain statute of limitations. Aggregate changes in the balance of gross unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):



	Fiscal Year Ended
	September 28, 2018			September 29, 2017			September 30, 2016
Beginning Balance	$	98,665		$	75,168		$	65,161
Gross increases - tax positions taken during prior years	—			308			4,343
Gross decreases - tax positions taken during prior years	(2,209		)	—			—
Gross increases - tax positions taken during current year	9,580			26,724			26,585
Gross decreases - settlements with tax authorities during current year	(130		)	(1,101		)	(20,086		)
Lapse of statute of limitations	(3,897		)	(2,434		)	(835		)
Ending Balance	$	102,009		$	98,665		$	75,168

Classification of Interest and Penalties

We include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. To the extent accrued interest and penalties do not ultimately become payable, amounts accrued are reduced in the period that such determination is made and are reflected as a reduction of the overall income tax provision. In fiscal year 2018, our current tax provision was increased by interest expense of $3.0 million, while in fiscal year 2017, our current tax provision was increased by interest expense of $1.8 million. Accrued interest and penalties are included within the related tax liability line item in our consolidated balance sheets. Our accrued interest and penalties on unrecognized tax benefits as of September 28, 2018 and September 29, 2017 were as follows (in thousands):



	Fiscal Year Ended
	September 28, 2018		September 29, 2017
Accrued interest	$	6,778	$	3,733
Accrued penalties	42		55
Total	$	6,820	$	3,788

We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected tolling of the statute of limitations in various taxing jurisdictions. We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The material income tax jurisdictions are the United States federal, California, New York, and the Netherlands.

We are currently under audit by the State of New York for fiscal years 2014 and 2015 and Spain for fiscal years 2012 through 2015. In the U.S federal jurisdiction, other major states, and major foreign jurisdictions, the fiscal years subsequent to 2013, 2013, and 2011, respectively, remain open and could be subject to examination by the taxing authorities.

Management does not believe that the outcome of any ongoing examination will have a material impact on our consolidated financial statements. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If resolution of any tax issues addressed in our current audits are inconsistent with management’s expectations, we may be required to adjust our tax provision for income taxes in the period such resolution occurs.