
	Fiscal
	2020		2019		2018
Currently payable:
Federal	$	(1,660)	$	1,995	$	1,163
State	471		557		114
Foreign	1,176		13,448		107,487
	(13)		16,000		108,764
Deferred and other:
Federal	(2,343)		(407)		26,334
State	(1,605)		516		(489)
Foreign	(24,623)		(9,886)		(20,414)
	(28,571)		(9,777)		5,431
Provision for (benefit from) income taxes	$	(28,584)	$	6,223	$	114,195


	Fiscal
	2020			2019			2018
Federal statutory tax expense (benefit)	$	(92,972)		$	12,610		$	88,684
Valuation allowance	15,231			7,925			4,263
Taxes on foreign earnings at rates greater (less) than U.S. rates, net	(27,041)			(8,210)			8,417

Stock-based compensation	3,640			556			(8,536)
State income taxes, net of federal income tax benefit	(1,249)			1,131			(373)
Research and development credit	(4,350)			(3,665)			(6,972)
Deferred compensation	(564)			(206)			(560)
Release of unrecognized tax benefits	(20,027)			(6,688)			(352)
Release of interest accrued for unrecognized tax benefits	(4,232)			(205)			(156)
Reversal of competent authority	8,552			—			—
U.S. tax reform impact	—			—			26,653
Deferred taxes on foreign earnings	1,303			1,215			—
Write-off of withholding tax credits	—			1,134			—
Goodwill impairment	89,962			—			—
Other, net	3,163			626			3,127
Provision for (benefit from) income taxes	$	(28,584)		$	6,223		$	114,195
Effective tax rate	6.5		%	10.4		%	31.6		%

Our effective tax rate on loss from continuing operations before income taxes for fiscal 2020 of 6.5% was lower than the U.S. federal tax rate of 21.0%. Our effective tax rate benefit for fiscal 2020 was unfavorably impacted primarily due to the impairment of goodwill that is not deductible for tax purposes and the establishment of valuation allowances for certain deferred tax assets. These unfavorable impacts were partially offset primarily from the release of unrecognized tax benefits net of settlements and competent authority offsets and losses in foreign jurisdictions subject to tax rates that are higher than the U.S. tax rates.

The effective tax rate on income from continuing operations before income taxes for fiscal 2019 of 10.4% was lower than the U.S. federal tax rate of 21.0% primarily due to the tax benefit from losses of our German subsidiaries, which are subject to higher tax rates than U.S. tax rates, adjustments related to the Tax Act's transition tax, the net excess tax benefits from restricted stock unit vesting, the benefit of federal research and development tax credits and our Singapore and South Korea tax exemptions. These amounts are partially offset by an accrual for foreign withholding taxes on certain current year foreign earnings not considered permanently reinvested, stock-based compensation not deductible for tax purposes and limitations on the deductibility of compensation under Internal Revenue Code Section 162(m).

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted and signed into law. U.S. GAAP rules require recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The tax relief measures for businesses include a five-year net operating loss ("NOL") carryback for any NOL generated in a taxable year beginning after December 31, 2017 and before January 1, 2021, suspension of the 80% limitation of NOL utilization for taxable years beginning before 2021, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, and technical corrections allowing accelerated deductions for qualified improvement property. The CARES Act also provided other non-tax benefits, including employee retention credits, to assist businesses impacted by the pandemic. There is no material impact of the tax benefits under the CARES Act on our consolidated financial statements.

Coherent Singapore made an additional capital contribution to Coherent Korea in 2019 to take advantage of the High-Tech tax exemption provided by the Korean authorities. The High-Tech tax exemption is effective retroactively to the beginning of fiscal 2019 and the amount was used entirely in that year. There was no additional benefit available for fiscal 2020. For fiscal 2019, the tax exemption decreased Coherent Korea income taxes by approximately $2.4 million and the benefit of the tax holiday on net income (loss) per diluted share was $0.10.

In October 2016, Coherent Singapore received an amended Pioneer Status tax exemption from the Singapore authorities effective from fiscal 2012 through fiscal 2021. The tax holiday continues to be conditional upon our meeting certain revenue, business spending and employment thresholds. The impact of this tax exemption decreased Coherent Singapore income taxes by approximately $2.6 million, $3.9 million, and $2.5 million in fiscal 2020, fiscal 2019, and fiscal 2018, respectively. The benefits of the tax holiday on net income (loss) per diluted share were $0.11, $0.16, and $0.10, respectively.


	Fiscal year-end
	2020		2019
Deferred tax assets:
Reserves and accruals not currently deductible	$	28,520	$	24,069
Operating loss carryforwards and tax credits	83,447		71,890

Deferred revenue	4,412		986
Depreciation and amortization	14,362		—

Stock-based compensation	4,906		5,649
Competent authority offset to transfer pricing tax reserves	4,283		10,585
Accumulated translation adjustment	2,508		5,459
Retirement and pension	17,982		16,618
Lease liabilities	21,737		—
Other	165		4,423
Total gross deferred tax assets	182,322		139,679
Valuation allowance	(57,707)		(41,491)
Total net deferred tax assets	124,615		98,188
Deferred tax liabilities:

Depreciation and amortization	—		23,625
Deferred tax liabilities on foreign earnings	16,055		14,603
Inventory capitalization	1,394		734
Right of use assets	20,859		—

Total gross deferred tax liabilities	38,308		38,962
Net deferred tax assets	$	86,307	$	59,226

In determining our fiscal 2020 and 2019 tax provisions under ASC 740, we calculated the deferred tax assets and liabilities for each separate tax entity. We then considered a number of factors including the positive and negative evidence regarding the realization of our deferred tax assets to determine whether a valuation allowance should be recognized with respect to our deferred tax assets. We determined that a valuation allowance was appropriate for a portion of the deferred tax assets of our California and certain state research and development tax credits, foreign tax attributes and foreign net operating losses at fiscal 2020 and 2019 year-ends.

During fiscal 2020, we increased our valuation allowance on deferred tax assets by $16.2 million to $57.7 million, primarily due to the net operating losses generated from certain foreign entities and California research and development tax credits, which are not expected to be recognized. At October 3, 2020, we had U.S. federal deferred tax assets related to research and development credits, foreign tax credits and other tax attributes that can be used to offset federal taxable income in future periods. These credit carryforwards will expire if they are not used within certain time periods. Management determined that there is sufficient positive evidence to conclude that it is more likely than not that sufficient taxable income will exist in the future allowing us to recognize these deferred tax assets.

•Foreign gross net operating loss carryforwards are $114.2 million, of which $87.1 million have no expiration date and $27.2 million have various expiration dates beginning in fiscal 2021. Among the total of $114.2 million foreign net operating loss carryforwards, a valuation allowance of $104.3 million has been provided for certain jurisdictions since the recovery of the carryforwards is uncertain. U.S. federal and certain state gross net operating loss carryforwards are $11.8 million and $30.7 million, respectively, which were acquired from our acquisitions. A full valuation allowance against certain state net operating losses of $30.7 million has been recorded.

•U.S. federal R&D credit carryforwards of $38.7 million are scheduled to expire beginning in fiscal 2025. California R&D credit carryforwards of $34.0 million have no expiration date. A total of $28.8 million valuation allowance, before U.S. federal benefit, has been recorded against California R&D credit carryforwards of $34.0 million since the recovery of the carryforwards is uncertain. Other states R&D credit carryforwards of $3.6 million are scheduled to expire beginning in fiscal 2021. A valuation allowance totaling $1.9 million, before U.S. federal benefit, has been recorded against certain state R&D credit carryforwards of $3.6 million since the recovery of the carryforwards is uncertain.

We are subject to taxation and file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. Our most significant tax jurisdictions are the U.S. and Germany. For U.S. federal and German income tax purposes, all years prior to fiscal 2017 and 2011, respectively, are closed to examination. In our other major foreign jurisdictions and our major state jurisdictions, the years prior to fiscal 2014 and 2016, respectively, are closed. Earlier years in our various jurisdictions may remain open for adjustment to the extent that we have tax attribute carryforwards from those years.

In November 2018, Coherent Korea Ltd. received a tax audit notice for fiscal 2016. The audit began in December 2018. The South Korean tax authorities also performed an audit focused on intercompany transfer pricing arrangements for fiscal 2014, 2015, and 2017. In May 2019, the South Korean tax authorities issued transfer pricing assessments for taxes, royalties, and sales commissions. We are in the process of appealing and contesting these assessments through the Competent Authority process between South Korea, Germany, and the United States. Accordingly, there is no change to our tax reserves at the time of filing of this annual report. We are continuing to monitor and evaluate this situation. In October 2020, the South Korean tax authorities advised us that they are performing an internal review of our initial and second High-Tech tax exemptions approved in fiscal 2013 and 2016, respectively. The tax authorities requested information to further substantiate the timing of the benefits of our exemptions and this review is currently ongoing.

In Germany, various Coherent and legacy Rofin entities are under audit for the years 2011 through 2016. The timing and the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Management believes that it has adequately provided for any adjustments that may result from tax examinations. We regularly engage in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of resolution, settlement, and closure of audits is not certain, we do not believe it is reasonably possible that our unrecognized tax benefits will materially change in the next 12 months.


	Fiscal year-end
	2020		2019		2018
Balance as of the beginning of the year	$	58,111	$	65,882	$	47,566

Tax positions related to current year:
Additions	1,410		605		19,033

Tax positions related to prior year:
Additions	86		448		117
Reductions	(17)		(6,071)		—

Lapses in statutes of limitations	(1,211)		(639)		(700)
Decrease in unrecognized tax benefits based on settlement	(19,463)		—		—
Foreign currency revaluation adjustment	591		(2,114)		(134)
Balance as of end of year	$	39,507	$	58,111	$	65,882

As of October 3, 2020, the total amount of gross unrecognized tax benefits including gross interest and penalties was $42.4 million, of which $31.2 million, if recognized, would affect our effective tax rate. In March 2020, German tax authorities completed their transfer pricing audits for certain legacy-Rofin German entities for fiscal 2013 through 2016. As a result, we released tax reserves of $17.3 million and reversed deferred tax assets of $8.7 million related to the competent authority offsets associated with the transfer pricing adjustments. In addition, legacy-Rofin U.S. audits for fiscal 2014 through 2016 were completed in fiscal 2020 and we recorded a benefit of $1.6 million. Our total gross unrecognized tax benefit, net of certain deferred tax assets is classified as a long-term taxes payable in the consolidated balance sheets. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of October 3, 2020, the total amount of gross interest and penalties accrued was $2.9 million and it is classified as Other long-term liabilities in the consolidated balance sheets. As of September 28, 2019, we had accrued $5.8 million for the gross interest and penalties and it is classified as Other long-term liabilities in the consolidated balance sheets.