Income Taxes

On December 22, 2017, the “Tax Cuts & Jobs Act” (hereafter referred to as “U.S. tax reform”) was signed into law and is effective for the Company starting in the quarter ended December 24, 2017. U.S. tax reform reduces the U.S. federal statutory tax rate from 35% to 21%, mandates payment of a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings. The impact on income taxes due to a change in legislation is required under the authoritative guidance of Accounting Standards Codification (“ASC”) 740, Income Taxes, to be recognized in the period in which the law is enacted. In conjunction, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during an up to one-year measurement period that is similar to the measurement period used when accounting for business combinations. As such, there is significant activity in the fiscal year ended June 24, 2018, which reflects the change in legislation. Most of that activity has provisionally been recorded in the Company’s Consolidated Financial Statements in the period ended June 24, 2018, as the Company has not yet completed all of the accounting for the tax effects of enactment. The Company recorded what it believes to be a reasonable estimate and the provisional activity is subject to further adjustments under SAB 118, with the exception of revaluation of its deferred tax balances to reflect the new U.S. federal statutory tax rate, which is considered final and complete under SAB 118. In addition, for significant items for which the Company could not make a reasonable estimate, no provisional activity was recorded. The Company will continue to refine the provisional balances and adjustments may be made under SAB 118 during the measurement period as a result of future changes in interpretation, information available, assumptions made by the Company and/or issuance of additional guidance; these adjustments could be material.

During the December 2017 quarter, a one-time transition tax on accumulated unrepatriated foreign earnings, estimated at $991.3 million, was recognized associated with the December 2017 U.S. tax reform. This value is identified as provisional in the Consolidated Financial Statements for the period ended June 24, 2018, and is subject to future measurement period adjustments under SAB 118. Such an adjustment was made during the June 2018 quarter, incorporating new information into the estimate; the Company may make further adjustments as new information is made available. The revised estimate is now $883.0 million.

The components of income (loss) before income taxes were as follows:



	Year Ended
	June 24, 2018		June 25, 2017		June 26, 2016
	(in thousands)
United States	$	128,190	$	7,553	$	(113,607	)
Foreign	3,023,599		1,804,120		1,073,724
	$	3,151,789	$	1,811,673	$	960,117

Significant components of the provision (benefit) for income taxes attributable to income before income taxes were as follows:



	Year Ended
	June 24, 2018			June 25, 2017			June 26, 2016
	(in thousands)
Federal:
Current	$	630,148		$	(70,858	)	$	1,426
Deferred	12,871			99,700			(38,616		)
	643,019			28,842			(37,190		)
State:
Current	5,348			(963		)	2,892
Deferred	(3,273		)	(2,246		)	(7,600		)
	2,075			(3,209		)	(4,708		)
Foreign:
Current	132,566			85,479			90,752
Deferred	(6,552		)	2,798			(2,786		)
	126,014			88,277			87,966
Total provision for income taxes	$	771,108		$	113,910		$	46,068

Revaluation of the Company’s deferred tax balances to reflect the new U.S. federal statutory tax rate was recorded in the year ended June 24, 2018 and is considered final and complete under SAB 118. The computation of the one-time transition tax on accumulated unrepatriated foreign earnings was recorded on a provisional basis in the year ended June 24, 2018 and is therefore subject to potential measurement period adjustments under SAB 118. The amount recorded related to the revaluation of the Company’s deferred tax balance was $42.5 million. Also, an associated tax liability was remeasured at $52.7 million. The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that was previously deferred from U.S. income taxes. The Company had previously accrued deferred taxes on a portion of this E&P. The Company has not yet completed the calculation of total post-1986 E&P and related income tax pools for its foreign subsidiaries. The Company recorded a provisional amount for the one-time transition tax of $883.0 million which was offset by the reversal of the associated previously accrued deferred taxes of $287.8 million. The net increase to tax expense recognized in the year ended June 24, 2018 was $595.2 million. The one-time transition tax may be elected to be paid over a period of eight years. The Company intends to make this election.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. Significant components of the Company’s net deferred tax assets and liabilities were as follows:



	June 24, 2018			June 25, 2017
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	206,073		$	175,595
Allowances and reserves	118,559			170,752
Equity-based compensation	16,189			25,828
Inventory valuation differences	14,021			19,602
Prepaid cost sharing	65,644			133,831
Other	16,514			20,175
Gross deferred tax assets	437,000			545,783
Valuation allowance	(199,839		)	(114,011		)
Net deferred tax assets	237,161			431,772
Deferred tax liabilities:
Intangible assets	(21,558		)	(30,944		)
Convertible debt	(60,252		)	(153,047		)
Capital assets	(61,429		)	(72,727		)
Amortization of goodwill	(10,738		)	(15,582		)
Unremitted earnings of foreign subsidiaries	(6,656		)	(302,663		)
Other	(7,955		)	(9,844		)
Gross deferred tax liabilities	(168,588		)	(584,807		)
Net deferred tax assets (liabilities)	$	68,573		$	(153,035	)

The change in the gross deferred tax assets, gross deferred tax liabilities, and valuation allowance between fiscal year 2018 and 2017 is primarily due to deferred revaluation to reflect the new U.S. statutory tax rate and decreases related to allowances and reserves, prepaid cost sharing, and unremitted earnings of foreign subsidiaries.

Realization of the Company’s net deferred tax assets is based upon the weighting of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more likely than not that such deferred tax assets will be realized with the exception of $199.8 million primarily related to California deferred tax assets. At June 24, 2018, the Company continued to record a valuation allowance to offset the entire California deferred tax asset balance due to the single sales factor apportionment election resulting in lower taxable income in California.

At June 24, 2018, the Company had federal net operating loss carryforwards of $126.8 million. The majority of these losses will begin to expire in fiscal year 2019, and are subject to limitation on their utilization.

At June 24, 2018, the Company had state net operating loss carryforwards of $24.5 million. If not utilized, these losses will begin to expire in fiscal year 2020 and are subject to limitation on their utilization.

At June 24, 2018, the Company had state tax credit carryforwards of $285.9 million. Substantially all of these credits can be carried forward indefinitely.

As a result of U.S. tax reform, the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 35% to 21%. As the Company has a fiscal year ending the last Sunday in June, it is subject to transitional tax rate rules. Therefore, a blended rate of 28.27% was computed as effective for the current fiscal year. The difference between the U.S. federal statutory tax rate of 28.27% and the Company’s effective tax rate for the year ended June 24, 2018 is primarily due to income in lower tax jurisdictions offset by the impact of U.S. tax reform.

A reconciliation of income tax expense provided at the federal statutory rate (28.27% in fiscal year 2018 and 35% in fiscal years 2017 and 2016) to actual income tax expense (benefit) is as follows:



	Year Ended
	June 24, 2018			June 25, 2017			June 26, 2016
	(in thousands)
Income tax expense computed at federal statutory rate	$	891,011		$	634,086		$	336,041
State income taxes, net of federal tax benefit	(50,585		)	(11,973		)	(14,070		)
Foreign income taxed at different rates	(939,808		)	(352,860		)	(265,123		)
Settlements and reductions in uncertain tax positions	(33,367		)	(144,519		)	—
Tax credits	(69,301		)	(37,713		)	(48,277		)
State valuation allowance, net of federal tax benefit	57,302			12,070			17,948
Equity-based compensation	(35,875		)	13,187			12,366
Other permanent differences and miscellaneous items	43,214			1,632			7,183
U.S. tax reform impacts	908,517			—			—
	$	771,108		$	113,910		$	46,068

In July 2015, the U.S. Tax Court issued an opinion favorable to Altera Corporation with respect to Altera’s litigation with the Internal Revenue Service. The litigation related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the U.S. Tax Court accepted Altera’s position of excluding stock-based compensation from its intercompany cost-sharing arrangement. In July 2018, the U.S. Court of Appeals for the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court. In August 2018, the opinion made by the U.S. Court of Appeals for the Ninth Circuit was withdrawn to allow time for a reconstituted panel to confer on the appeal. The Company is currently evaluating the impact, if any, of these subsequent events on the fiscal year 2019 Consolidated Financial Statements. The Company is unable to estimate the impact at this time.

Effective from fiscal year 2014 through 2017, the Company had a tax ruling in Switzerland for one of its foreign subsidiaries. The impact of the tax ruling decreased taxes by approximately $6.3 million and $4.3 million for fiscal year 2017 and 2016, respectively. The benefit of the tax ruling on diluted earnings per share was approximately $0.03 in fiscal year 2017 and $0.02 in fiscal year 2016. Effective fiscal year 2018, the Company has withdrawn its reduced tax rate ruling in Switzerland for this subsidiary due to the ruling being no longer necessary as the subsidiary meets the requirements to achieve the reduced tax rate under Swiss tax law.

Other significant items which are being evaluated by the Company but for which no estimate can currently be made and for which no provisional amounts were recorded in the Consolidated Financial Statements, include the impact of the GILTI provision of U.S. tax reform. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. This tax is effective for the Company after the end of the current fiscal year. However, the Company is evaluating whether deferred taxes should be recorded in relation to the GILTI provisions or if the tax should be recorded in the period in which it occurs. Based on current interpretation, the Company may choose either method as an accounting policy election. The Company has not yet decided on the accounting policy related to GILTI and will only do so after completion of the GILTI analysis. The provisions related to GILTI are subject to adjustment during the measurement period under SAB 118.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $456.1 million at June 24, 2018. If these earnings were remitted to the United States, they would be subject to foreign withholding taxes of approximately $74.9 million at current statutory rates.

As of June 24, 2018, the total gross unrecognized tax benefits were $305.4 million, compared to $339.4 million as of June 25, 2017, and $417.4 million as of June 26, 2016. During fiscal year 2018, gross unrecognized tax benefits decreased by $34.0 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $268.3 million, $247.6 million, and $323.4 million, as of June 24, 2018, June 25, 2017, and June 26, 2016, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:




	(in thousands)
Balance as of June 28, 2015	$	363,552
Lapse of statute of limitations	(10,992		)
Increases in balances related to tax positions taken during prior periods	18,200
Decreases in balances related to tax positions taken during prior periods	(421		)
Increases in balances related to tax positions taken during current period	47,093
Balance as of June 26, 2016	417,432
Settlements and effective settlements with tax authorities	(6,691		)
Lapse of statute of limitations	(113,491		)
Increases in balances related to tax positions taken during prior periods	6,557
Decreases in balances related to tax positions taken during prior periods	(11,528		)
Increases in balances related to tax positions taken during current period	47,168
Balance as of June 25, 2017	339,447
Settlements and effective settlements with tax authorities	(693		)
Lapse of statute of limitations	(88,837		)
Increases in balances related to tax positions taken during prior periods	2,044
Decreases in balances related to tax positions taken during prior periods	(1,320		)
Increases in balances related to tax positions taken during current period	54,772
Balance as of June 24, 2018	$	305,413

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $13.0 million, $15.7 million, and $42.4 million cumulatively for gross interest and penalties as of June 24, 2018, June 25, 2017, and June 26, 2016, respectively.

The Company is subject to audits by state and foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of June 24, 2018, tax years 2004-2018 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitations. The change in unrecognized tax benefits may range up to $28 million.