
	Income Taxes

The Tax Cuts and Jobs Act of 2017 (Tax Legislation), enacted on December 22, 2017, contains significant changes to U.S. tax law, including lowering the U.S. corporate income tax rate to 21.0%, implementing a territorial tax system, and imposing a one-time tax on deemed repatriated earnings of foreign subsidiaries.

The Tax Legislation reduced the U.S. statutory tax rate from 35.0% to 21.0%, effective January 1, 2018, which results in a blended statutory income tax rate for the Company of 23.4% for fiscal 2018.

The reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense for fiscal 2018, fiscal 2017 and fiscal 2016 is as follows:



	2018			2017			2016
U.S. federal statutory tax rate	23.4		%	35.0		%	35.0		%
Income tax provision reconciliation:
Tax at statutory rate:	$	383,413		$	289,970		$	334,922
Net foreign income subject to lower tax rate	(434,834		)	(385,189		)	(264,157		)
State income taxes, net of federal benefit	4,015			(8,801		)	(10,821		)
Valuation allowance	2,232			(7,778		)	13,658
Federal research and development tax credits	(33,602		)	(16,475		)	(16,237		)
Change in uncertain tax positions	(32,945		)	(51,088		)	4,797
Amortization of purchased intangibles	213,198			159,466			35,641
Acquisition and integration costs	—			109,040			—
Taxes attributable to the Tax Cuts and Jobs Act of 2017	70,029			—			—
Windfalls (Under ASU 2016-09)	(26,237		)	—			—
Other, net	(2,184		)	12,081			(2,546		)
Total income tax provision	$	143,085		$	101,226		$	95,257

For fiscal 2019, the Company’s U.S. statutory income tax rate will be 21.0%.

Taxes attributable to the Tax Legislation include a tax benefit of $637.0 million for the re-measurement of deferred tax assets and liabilities and a tax expense of $691.0 million for the one-time transition tax as explained further below. For fiscal 2017, acquisition and integration costs includes $98.2 million related to post acquisition integration and $10.8 million related to non-deductible acquisition costs.

As of November 3, 2018, the Company has not completed its accounting for the tax effects of the enactment of the Tax Legislation. However, as described below, the Company has made reasonable estimates of the effects on its existing deferred tax balances and the one-time transition tax in the fiscal 2018.

For financial reporting purposes, income before income taxes for fiscal 2018, fiscal 2017 and fiscal 2016 includes the following components:



	2018		2017		2016
Pretax income:
Domestic	$	590,190	$	109,565	$	2,642
Foreign	1,048,327		718,920		954,279
Income before income taxes	$	1,638,517	$	828,485	$	956,921

The components of the provision for income taxes for fiscal 2018, fiscal 2017 and fiscal 2016 are as follows:



	2018			2017			2016
Current:
Federal tax	$	826,294		$	857,664		$	27,790
State	5,917			7,335			1,409
Foreign	47,633			62,096			57,934
Total current	$	879,844		$	927,095		$	87,133
Deferred:
Federal	$	(744,260	)	$	(795,478	)	$	325
State	806			(24,285		)	2,820
Foreign	6,695			(6,106		)	4,979
Total deferred	$	(736,759	)	$	(825,869	)	$	8,124

In fiscal year 2018, the Company recorded a $637.0 million tax benefit for the re-measurement of deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21.0%. This provisional benefit is subject to revision based on further analysis and interpretation of the Tax Legislation and to the extent that future results differ from currently available projections.

This provisional benefit is subject to revision based on further analysis and interpretation of the Tax Legislation and to the extent that future results differ from currently available projections.

The Tax Legislation also implemented a territorial tax system. As part of transitioning to the territorial tax system, the Tax Legislation includes a one-time transition tax based on our total post-1986 undistributed foreign earnings and profits (E&P) that were previously deferred from U.S. income tax. In fiscal year 2018, the Company recorded a provisional tax expense amount for the one-time transition tax of $691.0 million, which is comprised of the $755.0 million transition tax liability less a deferred tax liability of $64.0 million that was recorded in prior years on a portion of the Company's E&P in certain foreign subsidiaries. This provisional estimate may be impacted by a number of additional considerations, including the issuance of final tax regulations that may impact the Company's ongoing analysis of the Tax Legislation and refinements to the Company's earnings and profits and foreign tax credit pools subject to the one-time transition taxes as well as the amount of earnings and profits held in cash or other specified assets. The Company intends to elect to pay this transition tax starting in fiscal 2019 over a period of eight years without incurring interest. As a result, $61.6 million of the transition tax is classified as current income taxes payable and $693.4 million is classified as non-current income taxes payable.

Additionally, the Tax Legislation subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries for tax years starting on or after January 1, 2018. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company is still evaluating the effects of the GILTI provisions and has not yet determined its accounting policy relating to deferred taxes and as such, no deferred tax impacts are included in the Company's financial statements for the fiscal 2018,

Prior to the Tax Legislation, the Company had not provided deferred taxes on certain undistributed earnings and other outside basis differences of its foreign subsidiaries as it was the Company's intention for these basis differences to remain indefinitely reinvested. The Tax Legislation fundamentally changes the U.S. approach to taxation of foreign earnings to a territorial tax system, which generally allows companies to make distributions of non-U.S. earnings to the United States without incurring additional U.S. tax. Additionally, as a result of the transition tax, substantially all of the Company’s undistributed earnings as of December 31, 2017 will not be subject to further U.S. federal income taxation. As a result, as of November 3, 2018, the Company is still in the process of analyzing the impact the Tax Legislation has on its indefinite reinvestment assertion.

The Company carries other outside basis differences in its subsidiaries, primarily arising from purchase accounting adjustments and undistributed earnings that are considered indefinitely reinvested. As of November 3, 2018, the Company has not recognized deferred income tax on $4.3 billion of outside basis differences because it has the intent and ability to indefinitely reinvest these basis differences. These basis differences could be reversed through a sale of the subsidiaries or the receipt of dividends from the subsidiaries, as well as various other events, none of which are considered probable at this time. Determination of the amount of unrecognized deferred income tax liability related to these outside basis differences is not practicable.

On December 22, 2017, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) directing taxpayers to consider the impact of the Tax Legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. Also, in March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to add various SEC paragraphs pursuant to the issuance of SAB 118, to Accounting Standards Codification topic 740, Income Taxes (ASC 740). In accordance with SAB 118, the amount reported for the tax benefit from re-measuring the Company’s net deferred tax liabilities to the lower 21.0% statutory rate and the amount reported for the additional U.S. income tax resulting from the one-time mandatory deemed repatriation including the ongoing evaluation of the impact on the Company’s indefinite reinvestment assertions regarding undistributed earnings and profits represents the Company's best estimate as it continues to accumulate and process data to finalize its underlying calculations and to review further guidance that regulators are expected to issue. The Company will continue to refine its adjustments through the permissible measurement period, which is not to extend beyond one year after the enactment date.

Many provisions in the Tax Legislation may have U.S. state and local income tax implications. While some states automatically adopt federal tax law changes, others may conform their laws on a specific date or may choose to decouple from the new federal tax law provisions. As such, the amount reported for U.S. state and local income taxes represents the Company’s best estimate as it continues to accumulate and process data to finalize its underlying calculations and to review further guidance. The Company expects to complete its analysis of the effects on state and local income taxes on or before December 22, 2018 as allowed by SAB 118.

During fiscal 2018 the Company also recorded a total of $26.2 million in discrete benefits for excess tax benefits from share-based payments, pursuant to ASU 2016-09, which became effective for fiscal 2018.

The significant components of the Company’s deferred tax assets and liabilities for fiscal 2018 and fiscal 2017 are as follows:



	2018			2017
Deferred tax assets:
Inventory reserves	$	22,184		$	28,137
Deferred income on shipments to distributors	46,168			62,923
Reserves for compensation and benefits	39,185			84,096
Tax credit carryovers	112,851			68,317
Stock-based compensation	53,105			99,815
Depreciation	1,707			2,659
Net operating losses	5,997			11,158
Acquisition-related costs	—			3,384
Other	34,031			34,737
Total gross deferred tax assets	315,228			395,226
Valuation allowance	(82,280		)	(53,787		)
Total deferred tax assets	232,948			341,439
Deferred tax liabilities:
Depreciation	(37,023		)	(64,868		)
Undistributed earnings of foreign subsidiaries	—			(64,067		)
Acquisition-related intangibles	(1,099,998		)	(1,851,818		)
Other	(1,914		)	(3,047		)
Total gross deferred tax liabilities	(1,138,935		)	(1,983,800		)
Net deferred tax liabilities	$	(905,987	)	$	(1,642,361	)

The valuation allowances of $82.3 million and $53.8 million at November 3, 2018 and October 28, 2017, respectively, are valuation allowances primarily for the Company’s state credit carryforwards. The Company believes that it is more-likely-than-not that these credit carryovers will not be realized and as a result has recorded a partial valuation allowance as of November 3, 2018. The state credit carryover of $112.9 million will begin to expire in 2019.

The net operating losses relate to the U.S and are not subject to a valuation allowance. These losses will begin to expire in fiscal 2030.

The Company has provided for potential tax liabilities due in the various jurisdictions in which the Company operates. Judgment is required in determining the worldwide income tax provision. In the ordinary course of global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of cost reimbursement arrangements among related entities. Although the Company believes its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in the historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

The Company’s effective tax rate reflects the applicable tax rate in effect in the various tax jurisdictions around the world where the Company's income is earned. The Company's effective tax rate is generally lower than the U.S. federal statutory rate, primarily due to lower statutory tax rates applicable to the Company's operations in jurisdictions in which the Company earns a portion of its income.

As of November 3, 2018 and October 28, 2017, the Company had a net liability of $16.8 million and $47.6 million, respectively, for unrealized tax benefits, all of which, if settled in the Company’s favor, would lower the Company’s effective tax rate in the period recorded. As of November 3, 2018 and October 28, 2017, the Company had a liability of approximately $3.5 million and $10.8 million, respectively, for interest and penalties. The Company includes interest and penalties related to unrecognized tax benefits within the provision for taxes in the consolidated statements of income. The total gross liability as of November 3, 2018 and October 28, 2017 of $16.8 million and $49.6 million, respectively, for uncertain tax positions is classified as non-current, and is included in non-current income taxes payable, because the Company believes that the ultimate payment or settlement of these liabilities may not occur within the next twelve months. The consolidated statements of income for fiscal year 2018, fiscal 2017 and fiscal 2016 include $(7.3) million, ($12.3) million and $4.0 million, respectively, of interest and penalties related to these uncertain tax positions. Over the next fiscal year, the Company anticipates the liability may be reduced up to $0.6 million for the possible expiration of an income tax statute of limitations.

The following table summarizes the changes in the total amounts of unrealized tax benefits for fiscal 2016 through fiscal 2018:



	Unrealized Tax Benefits
Balance, October 31, 2015	$	71,782
Additions for tax positions related to current year	2,539
Reductions for tax positions related to prior years	(4,475		)
Reductions due to lapse of applicable statute of limitations	(1,311		)
Balance, October 29, 2016	$	68,535
Additions for tax positions related to current year	1,742
Additions for tax positions related to acquisition	12,332
Reductions for tax positions related to prior years	(43,186		)
Reductions due to lapse of applicable statute of limitations	(1,566		)
Balance, October 28, 2017	$	37,857
Additions for tax positions related to current year	1,334
Reductions for tax positions related to prior years	(295		)
Reductions due to lapse of applicable statute of limitations	(25,640		)
Balance, November 3, 2018	$	13,256

In fiscal 2017 the Company released a reserve of $50.5 million, which was comprised of the $41.7 million in accrued tax and $8.8 million of accrued net interest due to favorable settlement with the U.S. Tax Court. The settled issued pertained to Section 965 of the Internal Revenue Code related to the beneficial tax treatment of dividends paid from foreign owned companies under The American Jobs Creation Act.

In fiscal 2018, the Company released reserves of $18.1 million relating to certain international transfer pricing matters, $4.2 million relating to worthless stock deductions and $3.3 million relating to other releases in fiscal year 2013 due to the lapse of the statute of limitations. With accrued interest of $9.9 million, the released reserves totaled $35.5 million.

The Company has numerous audits ongoing at any time throughout the world, including an Internal Revenue Service income tax audit for Linear’s pre-acquisition fiscal 2015 and fiscal 2016, various U.S. state and local tax audits, and transfer pricing audits in Spain, the Philippines and Ireland.

With the exception of the Linear pre-acquisition audit, the Company’s U.S. federal tax returns prior to fiscal year 2015 are no longer subject to examination.

All of the Company’s Ireland tax returns prior to fiscal year 2013 are no longer subject to examination. During the fourth quarter of fiscal 2018, the Company’s Irish tax resident subsidiary received an assessment for fiscal 2013 of approximately €43.0 million, or $52.0 million (as of November 3, 2018), from the Irish Revenue Commissioners. This assessment excludes any penalties and interest. The assessment claims that the Company’s Irish entity failed to conform to 2010 OECD Transfer Pricing Guidelines. The Company strongly disagrees with the assessment and maintains that its transfer pricing is appropriate. Therefore, the Company has not recorded any additional tax liability related to the 2013 tax year or any other periods. The Company intends to vigorously defend its originally filed tax return position and has filed an appeal with the Irish Tax Appeals Commission, which is the normal process for the resolution of differences between Irish Revenue and taxpayers. If Irish Revenue were ultimately to prevail with respect to its assessment for the tax year 2013, such assessment and any potential impact related to years subsequent to 2013 could have a material unfavorable impact on the Company's income tax expense and net earnings in future periods.

The tax returns for Linear Technology Pte. Ltd. (Singapore) prior to the fiscal 2018 are no longer subject to examination by the Economic Development Board pursuant to terms of the tax holiday re-negotiation.

The tax returns for Linear Semiconductor Sdn. Bhd. (Malaysia) prior to the fiscal year ended June 2012 are no longer subject to examination.

The Company has a partial tax holiday in Malaysia whereby the local statutory rate is significantly reduced, if certain conditions are met. The tax holiday for Malaysia is effective through July 2025. A partial tax holiday in Singapore had been in place through August 2019, but was terminated early effective September 2018 due to negotiations with the Economic Development Board. This was due to the on-going relocation of our test operations from our Singapore facility to our facilities in Malaysia and Philippines as well as certain OSAT partners. The impact of the Singapore and Malaysia tax holidays was to increase net income by approximately $27.7 million in fiscal year 2018 and $27.4 million in fiscal year 2017. The impact of the tax holidays during fiscal 2018 increased the basic and diluted net income per common share by $0.07 each. The impact of the tax holidays during fiscal 2017 increased the basic and diluted net income per common share by $0.08 each.

Although the Company believes its estimates of income taxes payable are reasonable, no assurance can be given that the Company will prevail in the matters raised or that the outcome of one or all of these matters will not be different than that which is reflected in the historical income tax provisions and accruals. The Company believes such differences would not have a material impact on the Company’s financial condition.