Income Taxes

12 Months Ended

Oct. 31, 2020

The Tax Cuts and Jobs Act of 2017 (Tax Legislation), enacted on December 22, 2017, contained 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 resulted 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 2020, fiscal 2019 and fiscal 2018 is as follows:


	2020			2019			2018 (1)
U.S. federal statutory tax rate	21.0		%	21.0		%	23.4		%
Income tax provision reconciliation:
Tax at statutory rate	$	275,439		$	312,003		$	387,343
Net foreign income subject to lower tax rate	(225,937)			(242,893)			(420,756)
State income taxes, net of federal benefit	(23,537)			(31,265)			4,428
Valuation allowance	13,655			34,069			2,232
Federal research and development tax credits	(31,055)			(50,769)			(33,602)
Change in uncertain tax positions	(13,304)			7,233			(32,945)
Amortization of purchased intangibles	101,906			111,547			213,198

Taxes attributable to the Tax Cuts and Jobs Act of 2017	—			(7,500)			56,608
U.S. effects of international operations	11,903			19,782			—
Windfalls (under ASU 2016-09)	(16,240)			(28,677)			(26,237)

Other, net	(1,974)			(813)			(1,935)
Total income tax provision	$	90,856		$	122,717		$	148,334

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

Income before income taxes for fiscal 2020, fiscal 2019 and fiscal 2018 includes the following components:


Income before income taxes (1)	2020		2019		2018 (2)

Domestic	$	355,442	$	484,876	$	615,238
Foreign	956,175		1,000,852		1,040,076
Income before income taxes	$	1,311,617	$	1,485,728	$	1,655,314

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(1)Income before income taxes reflects deemed intercompany royalties in all periods presented.

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

The components of the provision for income taxes for fiscal 2020, fiscal 2019 and fiscal 2018 are as follows:


	2020		2019		2018 (1)
Current:
Federal tax	$	64,876	$	74,049	$	824,848
State	4,882		2		6,043
Foreign	135,046		139,919		47,819
Total current	$	204,804	$	213,970	$	878,710
Deferred:
Federal	$	(159,229)	$	(158,472)	$	(738,163)
State	(12,684)		(3,627)		1,092
Foreign	57,965		70,846		6,695
Total deferred	$	(113,948)	$	(91,253)	$	(730,376)
Provision for income tax	$	90,856	$	122,717	$	148,334

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(1)Balances have been restated to reflect the adoption of ASU 2014-09. See Note 2a, Principles of Consolidation, of 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 October 31, 2020, 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 2020 and fiscal 2019 are as follows:


	2020		2019
Deferred tax assets:
Inventory reserves	$	17,074	$	21,081

Reserves for compensation and benefits	54,428		53,090
Tax credit carryovers	163,507		133,485

Stock-based compensation	12,758		63,589


Net operating losses	8,546		5,299
Intra-entity transfer of intangible assets	1,479,944		1,567,536
Lease liability	55,250		—
Other	159,838		70,974
Total gross deferred tax assets	1,951,345		1,915,054
Valuation allowance	(154,130)		(116,349)
Total deferred tax assets	1,797,215		1,798,705
Deferred tax liabilities:
Depreciation	(7,409)		(38,464)
Deferred GILTI tax liabilities	(1,183,955)		(1,254,029)
Right of use asset	(51,055)		—
Acquisition-related intangible	(971,327)		(1,012,042)

Total gross deferred tax liabilities	(2,213,746)		(2,304,535)
Net deferred tax liabilities	$	(416,531)	$	(505,830)

The valuation allowances of $154.1 million and $116.3 million at October 31, 2020 and November 2, 2019, respectively, are valuation allowances primarily for the Company’s state and international 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 $151.7 million will begin to expire in 2021 while the foreign investment tax credit carryover of $11.8 million will begin to expire in fiscal 2025.

As of October 31, 2020 and November 2, 2019, the Company had gross unrealized tax benefits of $21.3 million and $34.3 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 October 31, 2020 and November 2, 2019, the Company had a liability of approximately $3.4 million and $4.7 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 2020, fiscal 2019 and fiscal 2018 include $1.0 million, $1.5 million and $7.3 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 2018 through fiscal 2020:


	Unrealized Tax Benefits




















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
Additions for tax positions related to current year	3,270
Reductions for tax positions related to prior years	(16,152)
Reductions due to lapse of applicable statute of limitations	(170)
Balance, October 31, 2020	$	21,291

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 was previously under review by the Joint Committee on Taxation.

In fiscal 2020, the Company released reserves of $18.6 million, which included accrued interest as a result of the resolution of the amended tax return that was previously under review by the Joint Committee on Taxation, combined with other tax positions resolved by the closing of the Internal Revenue Service audit of Linear’s pre-acquisition federal income tax returns for fiscal 2015 through fiscal 2017.

The Company has numerous audits ongoing at any time throughout the world including: an IRS income tax audit for fiscal 2019 and fiscal 2018, various U.S. state and local tax audits and international audits, including the transfer pricing audit in Ireland discussed below. The Company’s U.S. federal tax returns prior to fiscal 2017 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 $50.2 million (as of October 31, 2020), 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 (fiscal 2014); the fiscal year ended October 31, 2015 (fiscal 2015); the fiscal year ended October 29, 2016 (fiscal 2016); and fiscal 2017. During fiscal 2019, the Company received confirmation from Irish Revenue that the audit relating to fiscal 2014 was complete with no further tax amount due in respect of that period. During fiscal 2020, the Company settled the audit relating to fiscal 2015 for an additional tax payment that was not material. The audits relating to 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 $4.6 million, $14.9 million and $27.7 million in fiscal 2020, fiscal 2019 and fiscal 2018, respectively, resulting in increases in basic and diluted net income per common share by $0.01, $0.04 and $0.07 in fiscal 2020, fiscal 2019 and fiscal 2018, respectively.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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