Income taxes

6 Months Ended

Jun. 27, 2020

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

We compute the year-to-date income tax provision by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjust for discrete tax items in the period in which they occur.

For the three months ended June 27, 2020, we had an income tax expense of $0.6 million on pre-tax loss of $27.2 million, which resulted in an effective tax rate of (2.2)%, compared with an income tax expense of $37.5 million on pre-tax income of $64.2 million, which resulted in an effective tax rate of 58.4% for the three months ended June 29, 2019.

For the six months ended June 27, 2020, we had an income tax benefit of $15.5 million on pre-tax loss of $3.4 million, which resulted in an effective tax rate of 455.9%, compared with an income tax benefit of $502.2 million on pre-tax income of $129.6 million, which resulted in an effective tax rate of (387.5)% for the six months ended June 29, 2019.

The decrease in the effective tax rate for the three months ended June 27, 2020 compared with the prior year period was due primarily to the recognition in the prior year of a discrete tax expense of $25.3 million related to revaluing our deferred tax assets to reflect the reduction in the Luxembourg corporate tax rate from 18% to 17%. In addition, during the three months ended June 27, 2020, we incurred $18.5 million of non-operating costs for which no tax benefit was recognized, whereas there were no similar costs incurred in the prior year period.

The increase in the effective tax rate for the six months ended June 27, 2020 compared with the prior year period was due primarily to the recognition in the prior year of a discrete benefit of $610.6 million related to the release of valuation allowances, mainly related to Luxembourg net operating losses, partially offset by a discrete expense of $65.1 million related to unrecognized tax benefits resulting primarily from the European business reorganization, and by a discrete expense of $25.3 million related to the reduction in the Luxembourg corporate tax rate. The current year rate is driven mainly by discrete tax benefits of $24.7 million, related to the reversal of unrecognized tax benefits, net of settlement amounts, arising from the resolution of audits in Canada and Germany and $3.2 million from law changes in India with respect to the taxation of dividends. These current period benefits were offset partially by $6.3 million of discrete expenses arising from the enactment in the U.S. of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). In addition, during the six months ended June 27, 2020, we incurred $18.5 million of non-operating costs for which no tax benefit was recognized, whereas there were no similar costs incurred in the prior year period.

Deferred Tax Assets and Liabilities

We recognize deferred tax assets and liabilities for future tax consequences arising from differences between the carrying amounts of existing assets and liabilities under U.S. GAAP and their respective tax bases, and for net operating loss carryforwards and tax credit carryforwards. We evaluate the recoverability of our deferred tax assets, weighing all positive and negative evidence, and are required to establish or maintain a valuation allowance for these assets if we determine that it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of deferred tax assets requires us to weigh all available evidence, including:

•taxable income in prior carry back years if carry back is permitted under the relevant tax law;

•future reversal of existing temporary differences;

•tax-planning strategies that are prudent and feasible; and

•future taxable income exclusive of reversing temporary differences and carryforwards.

As of each reporting date, management considers new evidence, both positive and negative, that could impact our view with regard to the future realization of deferred tax assets. We will maintain our positions with regard to future realization of deferred tax assets, including those with respect to which we continue maintaining valuation allowances, until there is sufficient new evidence to support a change in expectations. Such a change in expectations could arise due to many factors, including those impacting our forecasts of future earnings, as well as changes in the international tax laws under which we operate and tax planning. It is not reasonably possible to forecast any such changes at the present time, but it is possible that, should they arise, our view of their effect on the future realization of deferred tax assets may impact materially our financial statements.

Significant Events

On March 27, 2020, the CARES Act was enacted and signed into law in the U.S. in response to the COVID-19 pandemic. One of the provisions of this law is an increase to the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years. This modification significantly increases the current deductible interest expense of the Company for both years, which will result in a cash benefit while increasing our effective tax rate through requirements to allocate and apportion interest expense for certain other tax purposes, including in determining our global intangible low-taxed income inclusion, deduction for foreign derived intangible income, and the utilization of foreign tax credits.