Income Taxes

12 Months Ended

Oct. 02, 2020

8. INCOME TAXES

Income before income taxes consists of the following components (in millions):


	Fiscal Years Ended
	October 2, 2020		September 27, 2019		September 28, 2018
United States	$	435.9	$	427.2	$	712.2
Foreign	455.8		533.8		619.9
Income before income taxes	$	891.7	$	961.0	$	1,332.1

The provision for income taxes consists of the following components(in millions):


	Fiscal Years Ended
	October 2, 2020		September 27, 2019		September 28, 2018
Current tax expense (benefit):
Federal	$	44.4	$	85.3	$	347.7
State	—		(0.1)		0.3
Foreign	49.5		23.5		31.2
	93.9		108.7		379.2
Deferred tax expense (benefit):
Federal	(6.8)		(0.4)		20.3
Foreign	(10.2)		(0.9)		14.2
	(17.0)		(1.3)		34.5

Provision for income taxes	$	76.9	$	107.4	$	413.7

The actual income tax expense is different than that which would have been computed by applying the federal statutory tax rate to income before income taxes. A reconciliation of income tax expense as computed at the United States federal statutory income tax rate to the provision for income tax expense is as follows (in millions):


	Fiscal Years Ended
	October 2, 2020		September 27, 2019		September 28, 2018
Tax expense at United States statutory rate	$	187.3	$	201.8	$	327.4
Foreign tax rate difference	(86.6)		(115.3)		(111.9)
Tax on deemed repatriation	0.2		8.1		224.6
Effect of stock compensation	(10.3)		(1.6)		(25.6)
Change of tax rate on deferred taxes	—		—		18.3
Research and development credits	(23.0)		(25.7)		(19.9)
Change in tax reserve	10.1		14.0		6.7
Domestic production activities deduction	—		—		(13.9)
Global Intangible Low-Taxed Income	35.9		54.3		—
Foreign Derived Intangible Income	(41.2)		(41.5)		—
Settlements with Tax Authorities	(0.5)		4.3		—
Other, net	5.0		9.0		8.0
Provision for income taxes	$	76.9	$	107.4	$	413.7

The Company operates in foreign jurisdictions with income tax rates lower than the United States tax rate of 21.0% for the fiscal years ended October 2, 2020, and September 27, 2019. The Company’s tax benefits related to foreign earnings taxed at a rate less than the United States federal rate were $86.6 million and $115.3 million for the fiscal years ended October 2, 2020, and September 27, 2019, respectively.

The Tax Reform Act includes, among other things, a reduction of the United States corporate tax rate from 35.0% to 21.0%, a mandatory deemed repatriation tax on foreign earnings, repeal of the corporate alternative minimum tax and the domestic production activities deduction, and expensing of certain capital investments. The law makes fundamental changes to the

taxation of multinational entities, including a shift from worldwide taxation with deferral to a hybrid territorial system, featuring a participation exemption regime, a minimum tax on low-taxed foreign earnings, and new measures to deter base erosion and promote export from the United States. As a result of this legislation, during fiscal 2018 the Company recognized a one-time transition tax related to the deemed repatriation of foreign earnings of $224.6 million and a charge related to the revaluation of its deferred tax assets at the new corporate tax rate of $18.3 million. During fiscal 2020 and fiscal 2019, the Company recorded discrete income tax expense adjustments of $0.2 million and $8.1 million, respectively, to the prior year provisional estimates. The Company had accrued $18.6 million and $177.0 million of the deemed repatriation tax in short-term and long-term liabilities within the consolidated balance sheet, respectively, as of October 2, 2020. The Company had accrued $18.8 million and $195.9 million of the deemed repatriation tax in short-term and long-term liabilities within the consolidated balance sheet, respectively, as of September 27, 2019.

In addition to the introduction of a modified territorial tax system, the Tax Reform Act includes new sets of provisions aimed at preventing or decreasing U.S. tax base erosion: the GILTI provisions, the base erosion and anti-abuse tax (“BEAT”) provisions, and the FDII provisions. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company has made an accounting policy election to account for taxes due on GILTI inclusions as a component of current-period tax expense. The BEAT provisions eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. The FDII provisions allow a U.S. corporation an immediate deduction for a portion of its FDII. The amount of the deduction will depend in part on the Company’s U.S. taxable income. The GILTI and FDII provisions became effective for the Company in fiscal 2019 and resulted in a $54.3 million tax expense and a $41.5 million tax benefit, respectively. In fiscal 2020, the GILTI and FDII provisions resulted in $35.9 million tax expense and $41.2 million tax benefit, respectively. The Company has analyzed the BEAT provisions for fiscal 2020, 2019, and 2018, and has determined that it is not subject to the minimum tax imposed by the BEAT provisions.

The Company’s federal income tax returns for fiscal 2015, fiscal 2016, fiscal 2018, and fiscal 2019 are currently under IRS examination. During the year ended September 27, 2019, the Company effectively settled a portion of this IRS examination. As a result, the Company accrued a tax payable of $3.8 million, including interest.

On October 2, 2010, the Company expanded its presence in Asia by launching operations in Singapore. The Company operates under a tax holiday in Singapore, which is effective through September 30, 2030. The current tax holiday is conditioned upon the Company’s compliance with certain employment and investment thresholds in Singapore. The impact of the tax holiday decreased Singapore’s taxes by $63.1 million, $32.8 million, and $38.4 million for the fiscal years ended October 2, 2020, September 27, 2019, and September 28, 2018, respectively, which resulted in tax benefits of $0.37, $0.19, and $0.21 of diluted earnings per share, respectively.

Deferred income tax assets and liabilities consist of the tax effects of temporary differences related to the following (in millions):


	Fiscal Years Ended
	October 2, 2020		September 27, 2019
Deferred tax assets:
Inventory	$	12.1	$	10.1
Bad debts	0.1		0.2
Accrued compensation and benefits	10.1		5.9
Product returns, allowances, and warranty	0.4		0.3
Restructuring	—		0.6
Share-based and other deferred compensation	25.9		21.2
Net operating loss carry forwards	7.4		11.3
Non-United States tax credits	16.5		20.7
State tax credits	115.5		106.4
Leases	43.4		—
Property, plant, and equipment	24.3		17.7
Other, net	5.8		5.9
Deferred tax assets	261.5		200.3
Less valuation allowance	(137.4)		(129.1)
Net deferred tax assets	124.1		71.2
Deferred tax liabilities:
Prepaid insurance	(0.9)		(0.5)
Property, plant, and equipment	(26.4)		(19.3)
Intangible assets	(7.6)		(17.4)
Leases	(41.5)		—
Other, net	(6.6)		(6.3)
Net deferred tax liabilities	(83.0)		(43.5)
Total net deferred tax assets	$	41.1	$	27.7

In accordance with GAAP, management has determined that it is more likely than not that a portion of the Company's historic and current year income tax benefits will not be realized. As of October 2, 2020, the Company has a valuation allowance of $137.4 million. This valuation allowance is comprised of $118.8 million related to United States state tax credits and $18.6 million related to foreign deferred tax assets. The Company does not anticipate sufficient taxable income or tax liability to utilize these state and foreign credits. If these benefits are recognized in a future period, the valuation allowance on deferred tax assets will be reversed and up to a $137.4 million income tax benefit may be recognized. The Company will need to generate $124.1 million of future United States federal taxable income to utilize its United States deferred tax assets as of October 2, 2020. The Company believes that future reversals of taxable temporary differences, and its forecast of continued earnings in its domestic and foreign jurisdictions, support its decision to not record a valuation allowance on other deferred tax assets. The Company will continue to assess its valuation allowance in future periods. The net valuation allowance increased by $8.3 million and $10.5 million in fiscal 2020 and fiscal 2019, respectively, primarily related to increases for foreign and state net operating loss and tax credit carryovers.

As of October 2, 2020, the Company has United States federal net operating loss carry forwards of approximately $8.1 million. The utilization of these net operating losses is subject to certain annual limitations as required under Internal Revenue Code section 382 and similar state income tax provisions. The United States federal net operating loss carry forwards expire at various dates through 2035. The Company also has state income tax credit carry forwards of $115.4 million, net of federal benefits, for which the Company has provided a valuation allowance. The state tax credits relate primarily to California research tax credits that can be carried forward indefinitely.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in millions):


	Unrecognized tax benefits
Balance at September 27, 2019	$	103.3
Increases based on positions related to prior years	2.8
Decreases based on positions related to prior years	(3.9)
Increases based on positions related to current year	15.5
Decreases relating to settlements with taxing authorities	—
Decreases relating to lapses of applicable statutes of limitations	(0.1)
Balance at October 2, 2020	$	117.6

Of the total unrecognized tax benefits at October 2, 2020, $95.3 million would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, due to the Company’s valuation allowance and certain positions that were required to be capitalized.

The Company anticipates reversals within the next 12 months related to items such as the lapse of the statute of limitations, audit closures, and other items that occur in the normal course of business. Due to open examinations, an estimate of anticipated reversals within the next 12 months cannot be made. During the fiscal years 2020, 2019, and 2018, the Company recognized $4.6 million, $6.0 million, and $4.1 million, respectively, of interest or penalties related to unrecognized tax benefits. Accrued interest and penalties of $16.1 million and $12.7 million related to uncertain tax positions have been included in long-term tax liabilities within the consolidated balance sheet as of October 2, 2020, and September 27, 2019, respectively.

The Company’s major tax jurisdictions as of October 2, 2020, are the United States, California, Canada, Mexico, Japan, and Singapore. For the United States, the Company has open tax years dating back to fiscal 2001 due to the carry forward of tax attributes. For California, the Company has open tax years dating back to fiscal 1999 due to the carry forward of tax attributes. For Canada, the Company has open tax years dating back to fiscal 2013. For Mexico, the Company has open tax years back to fiscal 2014. For Japan, the Company has open tax years back to fiscal 2014. For Singapore, the Company has open tax years dating back to fiscal 2014. The Company is subject to audit examinations by the respective taxing authorities on a periodic basis, of which the results could impact its financial position, results of operations or cash flows.