Income Taxes

12 Months Ended

Nov. 03, 2018

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. As a result, 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 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 reconciliation of income tax computed at the U.S. federal statutory rates to income tax expense for fiscal 2019, fiscal 2018 and fiscal 2017 is as follows:


	2019			2018 (1)			2017 (1)
U.S. federal statutory tax rate	21.0		%	23.4		%	35.0		%
Income tax provision reconciliation:
Tax at statutory rate:	312,003			$	387,343		$	327,161
Net foreign income subject to lower tax rate	(242,893)			(420,756)			(395,800)
State income taxes, net of federal benefit	(31,265)			4,428			(7,239)
Valuation allowance	34,069			2,232			(7,778)
Federal research and development tax credits	(50,769)			(33,602)			(16,475)
Change in uncertain tax positions	7,233			(32,945)			(51,088)
Amortization of purchased intangibles	111,547			213,198			159,466
Acquisition and integration costs	—			—			109,040
Taxes attributable to the Tax Cuts and Jobs Act of 2017	(7,500)			56,608			—
U.S. effects of international operations	19,782			—			—
Windfalls (under ASU 2016-09)	(28,677)			(26,237)			—
Other, net	(813)			(1,935)			12,081
Total income tax provision	$	122,717		$	148,334		$	129,368

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(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements.

Income before income taxes for fiscal 2019, fiscal 2018 and fiscal 2017 includes the following components:


	2019		2018 (1)		2017 (1)

Domestic	$	484,876	$	615,238	$	161,248
Foreign	1,000,852		1,040,076		773,499
Income before income taxes	$	1,485,728	$	1,655,314	$	934,747

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(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements.

The components of the provision for income taxes for fiscal 2019, fiscal 2018 and fiscal 2017 are as follows:


	2019		2018 (1)		2017 (1)
Current:
Federal tax	$	74,049	$	824,848	$	868,051
State	2		6,043		8,594
Foreign	139,919		47,819		63,121
Total current	$	213,970	$	878,710	$	939,766
Deferred:
Federal	$	(158,472)	$	(738,163)	$	(780,310)
State	(3,627)		1,092		(23,982)
Foreign	70,846		6,695		(6,106)
Total deferred	$	(91,253)	$	(730,376)	$	(810,398)
Provision for income tax	$	122,717	$	148,334	$	129,368

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(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements.

In fiscal 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%. In addition, in fiscal 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. In the first quarter of fiscal 2019, the Company completed its accounting for the income tax effects of the Tax Legislation, in accordance with the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 and adjusted its provisional net charge by recording an additional tax benefit of $7.5 million for a change to its estimate for the transition tax due to the finalization of the aggregate foreign cash positions.

Additionally, the Tax Legislation subjects a U.S. shareholder to tax on global intangible low-taxed income (GILTI). Under U.S. GAAP, an accounting policy election can be made to either treat taxes due on the GILTI inclusion as a current period expense or to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years. The Company elected the deferral method and recorded the corresponding GILTI deferred tax assets and liabilities on its consolidated balance sheets.

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 2, 2019, the Company has not recognized deferred income tax on $22.8 billion of outside basis differences because of its 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.

The Company adopted ASU 2016-16 in the first quarter of fiscal 2019 using the modified retrospective method with a cumulative-effect adjustment directly to retained earnings. The adoption of ASU 2016-16 resulted in a net cumulative-effect adjustment that resulted in an increase in retained earnings of $331.0 million, by recording new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to GILTI. Adoption of the standard resulted in an increase in long-term deferred tax assets of $1.7 billion and an increase in long-term deferred tax liabilities of $1.3 billion.

The significant components of the Company’s deferred tax assets and liabilities for fiscal 2019 and fiscal 2018 are as follows:


	2019		2018 (1)
Deferred tax assets:
Inventory reserves	$	21,081	$	22,184

Reserves for compensation and benefits	53,090		39,185
Tax credit carryovers	133,485		112,851

Stock-based compensation	63,589		53,105


Net operating losses	5,299		5,997
Intra-entity transfer of intangible assets	1,567,536		—
Other	70,974		36,898
Total gross deferred tax assets	1,915,054		270,220
Valuation allowance	(116,349)		(82,280)
Total deferred tax assets	1,798,705		187,940
Deferred tax liabilities:
Depreciation	(38,464)		(37,023)
Deferred GILTI tax liabilities	(1,254,029)		—
Acquisition-related intangible	(1,012,042)		(1,129,747)
Other	—		(1,914)
Total gross deferred tax liabilities	(2,304,535)		(1,168,684)
Net deferred tax liabilities	$	(505,830)	$	(980,744)

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(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, in the Notes to Consolidated Financial Statements.

The valuation allowances of $116.3 million and $82.3 million at November 2, 2019 and November 3, 2018, 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. The state credit carryover of $133.5 million will begin to expire in 2020.

As of November 2, 2019 and November 3, 2018, the Company had gross unrealized tax benefits of $34.3 million and $13.3 million, respectively, which if settled in the Company's favor, would lower the Company's effective tax rate in the period recorded. Liabilities for uncertain tax benefits are classified as non-current because the Company believes that the ultimate payment or settlement of these liabilities may not occur within the next twelve months. As of November 2, 2019 and November 3, 2018, the Company had a liability of approximately $4.7 million and $3.5 million, respectively, for interest and penalties, which is included within the provision for taxes in the consolidated statements of income. The consolidated statements of income for fiscal year 2019, fiscal 2018 and fiscal 2017 include $1.5 million, $7.3 million and $12.3 million, respectively, of interest and penalties related to these uncertain tax positions.

The following table summarizes the changes in the total amounts of unrealized tax benefits for fiscal 2017 through fiscal 2019:


	Unrealized Tax Benefits




















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
Additions for tax positions related to current year	3,398

Additions for tax positions related to prior years	18,613
Reductions due to lapse of applicable statute of limitations	(924)
Balance, November 2, 2019	$	34,343

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 issue 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.

In fiscal 2019, the Company has reflected an unrealized tax benefit related to a refund claim of $11.4 million on a recently filed amended tax return that is currently being reviewed by the Joint Committee on Taxation.

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 years 2015, 2016, and 2017; various U.S. state and local tax audits; and international audits, including the transfer pricing audit in Ireland discussed below.

Except for the Linear pre-acquisition audit years, the Company’s U.S. federal tax returns prior to fiscal year ended October 29, 2016 are no longer subject to examination.

The Company’s Ireland tax returns prior to fiscal year ended November 2, 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 $48.0 million (as of November 2, 2019), from the Irish Revenue Commissioners (Irish Revenue). 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 fiscal 2013 or any other periods. The Company intends to vigorously defend its originally filed tax return position and is currently preparing for 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 fiscal 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. During the first quarter of fiscal 2019, Irish Revenue commenced transfer pricing audits of the fiscal years ended November 1, 2014; October 31, 2015; October 29, 2016; and October 28, 2017. During the fourth quarter of fiscal 2019, the Company received confirmation from Irish Revenue that the audit relating to the period ended November 1, 2014 was complete and that no further tax assessment arose in respect of that period. The audits related to fiscal 2015, fiscal 2016 and fiscal 2017 are on-going.

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 was terminated in September 2018 through negotiations with the Economic Development Board. The impact of the Singapore and

Malaysia tax holidays increased net income by approximately $14.9 million, $27.7 million and $27.4 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively, resulting in increases in basic and diluted net income per common share by $0.04, $0.07 and $0.08 in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.