Income Taxes

9 Months Ended

Sep. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes

Note 18. Income Taxes

ARRIS is subject to the U.K. statutory tax rate and a territorial corporate tax system. The U.K. statutory rate for 2018 is 19% as compared to 19.25% in 2017. The statutory rate in the U.K. decreased from 20% to 19% effective April 1, 2017. The Company’s statutory rate for 2017 represented the blended rate that was in effect for the year ended December 31, 2017 based on the 20% statutory rate that was effective for the first quarter of 2017 and the 19% rate effective for the remainder of 2017.

The Tax Cuts and Jobs Act of 2017 (the “Act”) enacted on December 22, 2017 introduced significant changes to U.S. income tax law including, but not limited to, a reduction to the U.S. statutory tax rate from 35% to 21%, creation of new taxes on certain foreign-sourced earnings and certain intercompany payments, introduction of limits on interest deductibility, and increased limitations on certain executive compensation. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected during 2018, except as noted below, the Company considers the accounting of the impacts of the Act to be incomplete due to additional work necessary to (1) determine re-measurement of any changes to deferred tax assets and liabilities associated with any acquisition accounting adjustments made within the acquisition accounting measurement period and (2) assess any forthcoming guidance. Any subsequent adjustment to these amounts is recorded to tax expense in the quarter of 2018 when the analysis is complete.

As the Company obtains and analyzes more information and interprets the Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies, the Company may adjust the provisional amounts. Those adjustments may materially affect the provision for income taxes and effective tax rate in the period in which the adjustments are made. The only significant adjustments made during the nine months ended September 30, 2018 were a direct result of the acquisition accounting adjustments made during the quarters.  As a result of the change to the fair value of certain assets and liabilities, the gross deferred tax amounts associated with those assets and liabilities also changed.  The fair value adjustments are as of the Ruckus acquisition date, December 1, 2017, resulting in the gross deferred tax impacts being measured at the applicable enacted tax rate of 35% on that date.  These deferred tax impacts were then remeasured to 21% to reflect the enacted rate as of December 22, 2017.  As a result of these acquisition accounting measurement period adjustments, the Company recorded discrete tax benefit of $2.9 million during the nine months ended September 30, 2018. No adjustments were made to fair value, and therefore there were no discrete tax impacts during the three months ended September 30, 2018.

During the third quarter of 2018, the Company finalized the impact of the one-time transition tax for the deemed repatriation of the earnings of the ARRIS controlled foreign corporations. The finalization of the 2017 earnings and profits amounts increased the transition tax from $(0.2) million benefit to $0.3 million tax expense. The Company has recorded current tax on its global intangible low-taxed income (“GILTI”) relative to the 2018 operations and has elected to account for GILTI as period costs when incurred. The Company will complete our analysis within the measurement period in accordance with Staff Accounting Bulletin No. 118.

For the period ended September 30, 2018, the Company changed its indefinite reinvestment assertion to reflect deferred income taxes on a portion of the unremitted earnings of certain subsidiaries. This change resulted in an additional $2.4 million of tax expense.

The Company reported the following operating results for the periods presented (in thousands):

	Three Months Ended September 30						Nine Months Ended September 30,
	2018			2017			2018			2017
Income before income taxes	$	30,156		$	72,504		$	41,468		$	61,646
Income tax benefit		(15,652	)		(14,311	)		(22,106	)		(12,613	)
Effective income tax rate		(51.9	)%		(19.7	)%		(53.3	)%		(20.5	)%

The Company’s effective income tax rate fluctuates based on, among other factors, the level and location of income. The difference between the U.K. federal statutory income tax rate, 19% and 19.25%, respectively, and our effective income tax rate for the 2018 and 2017 periods is primarily due to the benefits of other foreign income tax regimes and the U.S. federal research and development credits.

The Company’s effective income tax rate for the nine months ended September 30, 2018 was impacted by $1.5 million of expense related to excess book deductions for stock based compensation, $4.7 million of expense related to changes in permanent reinvestment assertions, offset by $12.4 million of benefit related to the release of uncertain tax positions due to settlement of audits and the expiration of statute of limitations, $2.8 million of benefit related to the effects of tax rate changes in the US, and $4.2 million of benefit related to an internal restructuring to move certain Ruckus Networks intangible property into the U.S.

The Company’s effective income tax rate for the nine months ended September 30, 2017 was impacted by $8.0 million of expense related to the intra-entity sale of an asset, offset by $9.8 million of benefit related to a decrease of interest related to uncertain tax positions and the release of uncertain tax positions due to settlement of audits and expiration of statute of limitations, and a $1.2 million of benefit related to excess tax deductions for stock-based compensation.