Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company is required to estimate its income taxes in each of the jurisdictions in which it operates as part of the process of preparing its condensed consolidated financial statements. The Company maintains certain strategic management and operational activities in overseas subsidiaries and its foreign earnings are taxed at rates that are generally lower than in the United States.

The Company’s effective tax rate generally differs from the U.S. federal statutory rate primarily due to lower tax rates on earnings generated by the Company’s foreign operations that are taxed primarily in Switzerland.

The Company’s effective tax rate was (150.5)% and 0.4% for the three months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the three months ended September 30, 2019 to the three months ended September 30, 2018 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of Switzerland’s Federal Act on Tax Reform and AHV Financing (“TRAF”), as well as a $17.3 million tax

benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.

The Company’s effective tax rate was (42.3)% and 7.2% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in the effective tax rate when comparing the nine months ended September 30, 2019 to the nine months ended September 30, 2018 was primarily due to tax items unique to the period ended September 30, 2019. These amounts include an estimated income tax benefit of $157.7 million due to the recognition of Swiss deferred tax assets related to the enactment of Switzerland’s TRAF, as well as a $17.3 million tax benefit attributable to the 2015 U.S. federal income tax return statute of limitations closing during the three months ended September 30, 2019.

The Company considers the income tax impact of the TRAF to be an estimate based on the Company's current interpretation of the TRAF and is subject to change upon valuation, further legislative guidance and the Swiss tax authority review of the federal tax filing. This additional federal benefit is expected to be fully realized over a 10 year amortization period. Additionally, there may be further updates due to the pending implementation of Swiss tax reform on the cantonal level anticipated in the fourth quarter of 2019 or first quarter of 2020. The Company will review any further issued guidance and continue to evaluate the federal and cantonal income tax impact of tax reform in Switzerland.

The Company’s net unrecognized tax benefits totaled $84.3 million and $89.9 million as of September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, $57.3 million included in the balance for tax positions would affect the annual effective tax rate if recognized. The Company recognizes interest accrued related to uncertain tax positions and penalties in income tax expense. As of September 30, 2019, the Company has accrued $4.0 million for the payment of interest.

The Company and one or more of its subsidiaries are subject to U.S. federal income taxes in the United States, as well as income taxes of multiple state and foreign jurisdictions. The Company is not currently under examination by the United States Internal Revenue Service. With few exceptions, the Company is generally not subject to examination for state and local income tax, or in non-U.S. jurisdictions, by tax authorities for years prior to 2016.

The Company's U.S. liquidity needs are currently satisfied using cash flows generated from its U.S. operations, borrowings, or both. The Company also utilizes a variety of tax planning strategies in an effort to ensure that its worldwide cash is available in locations in which it is needed. The Company expects to repatriate a substantial portion of its foreign earnings over time, to the extent that the foreign earnings are not restricted by local laws or result in significant incremental costs associated with repatriating the foreign earnings.

At September 30, 2019, the Company had $300.3 million in net deferred tax assets. The authoritative guidance requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income and gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. If the estimates and assumptions used in the Company's determination change in the future, the Company could be required to revise its estimates of the valuation allowances against its deferred tax assets and adjust its provisions for additional income taxes.

On July 24, 2018, the U.S. Ninth Circuit Court of Appeals overturned the U.S. Tax Court’s unanimous decision in Altera v. Commissioner, where the Tax Court held the Treasury regulation requiring participants in a qualified cost sharing arrangement to share stock-based compensation costs to be invalid. On August 7, 2018, the U.S. Ninth Circuit Court of Appeals, on its own motion, withdrew its July 24, 2018 opinion to allow time for a reconstituted panel to confer. Given the increased uncertainty as to the Ninth Circuit panel's eventual ruling and the impact it will have on the Internal Revenue Service’s ability to challenge the technical merits of the Company's position, the Company accrued amounts for this uncertain tax position as of the year ended December 31, 2018. On June 7, 2019, a reconstituted panel issued a new opinion which again reversed the Tax Court's holding in Altera v. Commissioner and upheld a 2003 regulation that requires participants in a cost-sharing arrangement to share stock-based compensation costs. The Ninth Circuit panel concluded that the 2003 regulations were valid under the Administrative Procedure Act. Since the Company previously accrued amounts for this uncertain tax position, there were no changes to the Company's position or treatment of its cost-sharing arrangements in the current period. On July 22, 2019, Altera Corp. filed an appeal with the Ninth Circuit to rehear this case, which is ongoing. Therefore, the case's final disposition may result in a benefit for the Company in the future if the case is reversed.