Income Taxes

12 Months Ended

Jun. 30, 2019

On December 22, 2017, the “Tax Cuts & Jobs Act” was signed into law and was effective for the Company starting in the quarter ended December 24, 2017. U.S. tax reform reduced the U.S. federal statutory tax rate from 35% to 21%, assessed a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and created 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 allowed 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. The Company recorded what it believed to be reasonable estimates during the SAB 118 measurement period. During the December 2018 quarter, the Company finalized the accounting of the income tax effects of U.S. tax reform. Although the SAB 118 measurement period has ended, there may be some aspects of U.S. tax reform that remain subject to future regulations and/or notices which may further clarify certain provisions of U.S. tax reform. The Company may need to adjust its previously recorded amounts to reflect the recognition and measurement of its tax accounting positions in accordance with ASC 740; such adjustments could be material.

The computation of the one-time transition tax on accumulated unrepatriated foreign earnings was recorded on a provisional basis in the amount of $883.0 million in the fiscal year ended June 24, 2018, as permitted under SAB 118. The Company recorded a subsequent provisional adjustment of $36.6 million, as a result of incorporating new information into the estimate, in the Condensed Consolidated Financial Statements in the three months ended September 23, 2018. The Company finalized the computation of the transition tax liability during the December 2018 quarter. The final adjustment resulted in a tax benefit of $51.2 million, which was recorded in the Company’s Condensed Consolidated Financial Statements in the three months ended December 23, 2018. The final balance of total transition tax is $868.4 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 completed the calculation of total post-1986 E&P and related income tax pools for its foreign subsidiaries. The Company elected to pay the one-time transition tax over a period of eight years.

Beginning in fiscal year 2019, the Company is subject to 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. The Company has calculated the impact of the GILTI provision on current year earnings and has included the impact in the effective tax rate. The Company made an accounting policy election in the September 2018 quarter to record deferred taxes in relation to the GILTI provision, and recorded a provisional tax benefit of $48.0 million in the Condensed Consolidated Financial Statements in the three months ended September 23, 2018, under SAB 118. The Company finalized the computation of the accounting policy election during the December 2018 quarter. The final adjustment resulted in a tax expense of $0.4 million, which was recorded in the Company’s Condensed Consolidated Financial Statements in the three months ended December 23, 2018. The final tax benefit of the election is $47.6 million.

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



	Year Ended
	June 30, 2019			June 24, 2018		June 25, 2017
	(in thousands)
United States	$	(59,876	)	$	128,190	$	7,553
Foreign	2,506,447			3,023,599		1,804,120
	$	2,446,571		$	3,151,789	$	1,811,673

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



	Year Ended
	June 30, 2019			June 24, 2018			June 25, 2017
	(in thousands)
Federal:
Current	$	143,845		$	630,148		$	(70,858	)
Deferred	(10,722		)	12,871			99,700
	133,123			643,019			28,842
State:
Current	5,994			5,348			(963		)
Deferred	4,944			(3,273		)	(2,246		)
	10,938			2,075			(3,209		)
Foreign:
Current	110,283			132,566			85,479
Deferred	797			(6,552		)	2,798
	111,080			126,014			88,277
Total provision for income taxes	$	255,141		$	771,108		$	113,910

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 30, 2019			June 24, 2018
	(in thousands)
Deferred tax assets:
Tax carryforwards	$	231,390		$	206,073
Allowances and reserves	97,671			118,559
Equity-based compensation	14,661			16,189
Inventory valuation differences	18,516			14,021
Prepaid cost sharing	74,139			65,644
Outside basis differences of foreign subsidiaries	16,260			—
Other	17,972			16,514
Gross deferred tax assets	470,609			437,000
Valuation allowance	(226,928		)	(199,839		)
Net deferred tax assets	243,681			237,161
Deferred tax liabilities:
Intangible assets	(9,883		)	(21,558		)
Convertible debt	(46,993		)	(60,252		)
Capital assets	(83,298		)	(61,429		)
Amortization of goodwill	(11,299		)	(10,738		)
Outside basis differences of foreign subsidiaries	—			(6,656		)
Other	(8,752		)	(7,955		)
Gross deferred tax liabilities	(160,225		)	(168,588		)
Net deferred tax assets	$	83,456		$	68,573

The increase in the gross deferred tax assets and valuation allowance between fiscal year 2019 and 2018 is primarily due to increases in tax carryforwards.

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 $227.0 million primarily related to California deferred tax assets. At June 30, 2019, the Company continued to record a valuation allowance to offset the entire California deferred tax asset balance due to the single sales factor apportionment resulting in lower taxable income in California.

At June 30, 2019, the Company had federal net operating loss carryforwards of $109.8 million. The majority of these losses will begin to expire in fiscal year 2020, and are subject to limitation on their utilization.

At June 30, 2019, the Company had state net operating loss carryforwards of $58.5 million. If not utilized, these losses will begin to expire in fiscal year 2020 and are subject to limitation on their utilization.

At June 30, 2019, the Company had state tax credit carryforwards of $322.4 million. Substantially all of these credits can be carried forward indefinitely.

A reconciliation of income tax expense provided at the federal statutory rate (21% in fiscal year 2019, 28.27% in fiscal year 2018, and 35% in fiscal year 2017) to actual income tax expense is as follows:



	Year Ended
	June 30, 2019			June 24, 2018			June 25, 2017
	(in thousands)
Income tax expense computed at federal statutory rate	$	513,780		$	891,011		$	634,086
State income taxes, net of federal tax benefit	(17,565		)	(50,585		)	(11,973		)
Foreign income taxed at different rates	(260,344		)	(939,808		)	(352,860		)
Settlements and reductions in uncertain tax positions	(31,291		)	(33,367		)	(144,519		)
Tax credits	(71,779		)	(69,301		)	(37,713		)
State valuation allowance, net of federal tax benefit	26,742			57,302			12,070
Equity-based compensation	(7,566		)	(35,875		)	13,187
Other permanent differences and miscellaneous items	39,251			43,214			1,632
U.S. tax reform impacts	63,913			908,517			—
	$	255,141		$	771,108		$	113,910

In July 2015, the U.S. Tax Court issued an opinion favorable to Altera with respect to Altera’s litigation with the IRS. 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 June 2019, the Ninth Circuit, through a three-judge panel, reversed the 2015 decision of the U.S. Tax Court. Altera has petitioned the Ninth Circuit for an en banc rehearing of a larger panel of eleven Ninth Circuit judges. The Company will continue to monitor and evaluate the potential impact of this litigation on its fiscal year 2020 Consolidated Financial Statements. The estimated potential impact is in the range of $75 million, which may result in a decrease in deferred tax assets and an increase in tax expense.

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 for fiscal year 2017. The benefit of the tax ruling on diluted earnings per share was approximately $0.03 in fiscal year 2017. 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.

Earnings of the Company’s foreign subsidiaries included in consolidated retained earnings that are indefinitely reinvested in foreign operations aggregated to approximately $458.4 million at June 30, 2019. If these earnings

were remitted to the United States, they would be subject to foreign withholding taxes of approximately $73.1 million at current statutory rates.

As of June 30, 2019, the total gross unrecognized tax benefits were $420.8 million, compared to $305.4 million as of June 24, 2018, and $339.4 million as of June 25, 2017. During fiscal year 2019, gross unrecognized tax benefits increased by $115.4 million. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $376.0 million, $268.3 million, and $247.6 million, as of June 30, 2019, June 24, 2018, and June 25, 2017, respectively. The aggregate changes in the balance of gross unrecognized tax benefits were as follows:




	(in thousands)
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
Settlements and effective settlements with tax authorities	(3,705		)
Lapse of statute of limitations	(28,176		)
Increases in balances related to tax positions taken during prior periods	78,927
Decreases in balances related to tax positions taken during prior periods	(1,577		)
Increases in balances related to tax positions taken during current period	69,890
Balance as of June 30, 2019	$	420,772

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company had accrued $19.1 million, $13.0 million, and $15.7 million cumulatively for gross interest and penalties as of June 30, 2019, June 24, 2018, and June 25, 2017, 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 30, 2019, tax years 2004-2019 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 $12 million.