Income Taxes

On December 22, 2017, the U.S. enacted legislation referred to as the "Tax Act". Among other things, the Tax Act reduces the U.S. corporate federal income tax rate from 35% to 21%, adds base broadening provisions which limit deductions and address excessive international tax planning, imposes a Toll Charge on accumulated earnings of certain non-U.S. subsidiaries and enables repatriation of earnings of non-U.S. subsidiaries free of U.S. federal income tax. Other than the Toll Charge (which, except for the IXYS impact, was applicable to the Company for 2017), the provisions are generally applicable to the Company in 2018 and beyond.

In accordance with the guidance provided in SEC SAB No. 118, in the fourth quarter of 2017 the Company recorded a charge of $47.0 million as a provisional reasonable estimate of the impact of the Tax Act, including $49.0 million for the Toll Charge net of $2.0 million for other net tax benefits. In the fourth quarter of 2018, within the measurement period outlined in SAB No. 118, the Company finalized its estimates of the impact of the Tax Act as of December 30, 2017 and recorded a charge of $3.2 million, including $2.3 million for the Toll Charge and $0.9 million for the net impact of other items. In addition, the Company recorded $7.0 million for the Toll Charge associated with IXYS as part of the IXYS acquisition purchase price allocation. This was reflected in the opening balance sheet as an increase to goodwill and other long-term liabilities.

Although certain administrative guidance has been issued, including final and proposed regulations, the appropriate application of many provisions of the Tax Act remain uncertain. The Company used its best judgment as to the application of these provisions in determining its final estimates of the impact of the Tax Act as of December 30, 2017, the Toll Charge associated with the IXYS acquisition as well as the Company’s income tax expense for the year ended December 29, 2018. Adjustments to income tax expense may be necessary in future periods if provisions of the Tax Act, and their interaction with other provisions of the U.S. Internal Revenue Code, are interpreted differently than interpretations made by the Company, whether through issuance of additional administrative guidance, or through further review of the Tax Act by the Company and its advisors. In this regard, on January 15, 2019, final regulations were issued addressing the Toll Charge (replacing the proposed regulations issued in August of 2018). The Company is evaluating these final regulations and has yet to determine their impact.

The Company has elected to pay the 2017 Littelfuse Toll Charge and will elect to pay the 2018 IXYS Toll Charge over the eight-year period prescribed by the Tax Act. The long-term portion of these Toll Charges totaling $28.8 million (which includes the Littelfuse and IXYS Toll Charges, partially offset by foreign tax credits, the tax benefit of current year losses and the actual 2018 and anticipated 2019 annual installment payments) is recorded in Other long-term liabilities on the Consolidated Balance Sheet as of December 29, 2018. The anticipated 2019 annual installment payments are included in accrued income taxes.

One of the base broadening provisions of the Tax Act is commonly referred to as the “GILTI” provisions. In accordance with guidance issued by the FASB staff, the Company has adopted an accounting policy to treat any GILTI inclusions as a period cost if and when incurred. Thus, for the year ended December 29, 2018, deferred taxes were computed without consideration of the possible future impact of the GILTI provisions, and any current year impact was recorded as a part of the current portion of income tax expense.

Domestic and foreign income (loss) before income taxes is as follows:



(in thousands)	2018			2017			2015
Domestic	$	(49,995	)	$	(20,496	)	$	(9,563	)
Foreign	254,937			224,533			132,837
Income before income taxes	$	204,942		$	204,037		$	123,274

Federal, state and foreign income tax expense (benefit) consists of the following:



(in thousands)	2018			2017		2016
Current:
Federal	$	(3,193	)	$	34,060	$	(3,992	)
State	119			450		(648		)
Foreign	48,130			32,945		28,695
Subtotal	45,056			67,455		24,055
Deferred:
Federal and State	(3,896		)	16,562		(1,594		)
Foreign	(783		)	501		(3,675		)
Subtotal	(4,679		)	17,063		(5,269		)
Provision for income taxes	$	40,377		$	84,518	$	18,786

The current federal tax benefit for 2018 includes the benefit of current year losses (which served to partially offset the amount of the IXYS Toll Charge that would otherwise have been payable).

The current federal and state income tax expense for 2017 includes the preliminary estimate of $49 million for the Toll Charge as discussed above, partially offset by $13.0 million of foreign tax credits.

The current federal tax benefit for 2016 includes an estimated $3.0 million benefit as a result of the carry-back of the 2016 U.S. federal net operating loss to the 2014 tax year.

A reconciliation between income taxes computed on income before income taxes at the federal statutory rate and the provision for income taxes is provided below:



(in thousands)	2018			2017			2016
Tax expense at statutory rate of 21% (35% for 2017 and 2016)	$	43,038		$	71,413		$	43,146
2017 Toll Charge (and 2018 adjustment)	2,278			49,000			—
Provisional Tax Act impact other than Toll Charge (and 2018 adjustment)	966			(1,962		)	—
Net impact associated with the GILTI tax provisions	5,075			—			—
State and local taxes, net of federal tax benefit	(1,238		)	292			(415		)
Non-U.S. income tax rate differential	(20,472		)	(47,077		)	(25,471		)
Impairment of goodwill without tax benefit	—			—			3,088
Tax on unremitted earnings	4,660			12,202			2,747
Non-U.S. losses and expenses with no tax benefit	3,107			—			—
Nondeductible professional fees	1,001			1,240			313
Tax deduction for stock of foreign subsidiary	—			—			(3,896		)
Other, net	1,962			(590		)	(726		)
Provision for income taxes	$	40,377		$	84,518		$	18,786

Deferred income taxes are provided for the tax effects of temporary differences between the financial reporting bases and the tax bases of the company’s assets and liabilities. Significant components of the company’s deferred tax assets and liabilities at December 29, 2018 and December 30, 2017, are as follows:



(in thousands)	2018			2017
Deferred tax assets:
Accrued expenses and reserves	$	35,597		$	24,094
Foreign tax credit carryforwards	1,506			1,053
Other U.S. tax attribute carryforwards	1,539			—
Accrued restructuring	60			156
Capital loss carryforwards	47			3,165
Domestic and non-U.S. net operating loss and credit carryforwards	8,613			5,778
Gross deferred tax assets	47,362			34,246
Less: Valuation allowance	(4,794		)	(6,203		)
Total deferred tax assets	42,568			28,043

Deferred tax liabilities:
Excess of book basis over the tax basis of assets	74,410			21,254
Tax on unremitted earnings	12,681			12,000
Total deferred tax liabilities	87,091			33,254
Net deferred tax liabilities	$	44,523		$	5,211

The deferred tax asset valuation allowance is related to certain net operating loss and credit carryforwards which are not expected to be realized. The remaining net operating loss and credit carryforwards either have no expiration date or are expected to be utilized prior to expiration (which begin expiring in 2021). The deferred tax asset valuation allowance as of December 30, 2017 also included amounts related to a capital loss carryforward which expired in 2018. No deferred tax asset nor valuation allowance has been recorded for certain U.S. and non-U.S. net operating loss carryforwards for which the possibility of usage has been determined to be remote.

The Company paid income taxes of $46.2 million, $31.8 million, and $35.6 million in 2018, 2017, and 2016, respectively, and received income tax refunds of and $4.3 million and $13.7 million in 2018 and 2017, respectively.

Deferred income taxes are not provided on the excess of the investment value for financial reporting over the tax basis of investments in those non-U.S. subsidiaries for which such excess is considered to be permanently reinvested in those operations. The Company believes the determination of the amount of such deferred income taxes is impractical as it would depend upon income tax laws and circumstances at the time of the hypothetical distributions or dispositions. As of December 29, 2018, unremitted earnings of the Company’s non-U.S. subsidiaries was approximately $815 million. A distribution of such earnings will generally not be subject to U.S. federal income tax. The Company recognized deferred tax liabilities of $12.7 million ($12.5 million for non-U.S. taxes net of related U.S. foreign tax credits, and $0.2 million for U.S. state taxes) as of December 29, 2018 and $12.0 million ($11.8 million for non-U.S. taxes and $0.2 million for U.S. state taxes) as of December 30, 2017, related to taxes on certain non-U.S. earnings which are not considered to be permanently reinvested. Some of these non-U.S. taxes will provide a U.S. federal income tax benefit as a foreign tax credit, and the amounts as of December 29, 2018 are net of such benefit (some of which was recorded as part of finalizing the provisional reasonable estimate of the impact of the Tax Act). Due to the uncertainty in regard to the Tax Act’s provisions, no benefit was recorded for these foreign tax credits as of December 30, 2017.

The Company has three subsidiaries in China which benefit from lowered income tax rates due to “tax holidays” which apply for three-year periods, subject to extension. One such tax holiday, which had expired in 2018, was extended in the fourth quarter of 2018, retroactive to the beginning of the year. Such tax holidays contributed $6.1 million in tax benefits, or $0.24 per diluted share, during 2018, with similar amounts expected in future years while such tax holidays are in effect.

A reconciliation of the beginning and ending amount of unrecognized tax benefits as of December 29, 2018, December 30, 2017, and December 31, 2016 is as follows:



(in thousands)	Unrecognized Tax Benefits
Balance at December 31, 2016	$	8,617
Additions for tax positions taken in the current year	370
Other	(1,327		)
Balance at December 30, 2017	$	7,660
Additions for tax positions taken in the current year	2,929
Additions for tax positions related to the pre-acquisition periods of acquired subsidiaries	9,394
Decreases due to a lapse in the statute of limitations	(1,257		)
Other	(467		)
Balance at December 29, 2018	$	18,259

The company recognizes accrued interest and penalties associated with uncertain tax positions as part of income tax expense. The company recognized interest expense of $1.5 million (net of a $0.3 million decrease due to a lapse in the statute of limitations), $0.9 million, and $0.9 million in 2018, 2017, and 2016, respectively. Accrued interest included in Other long-term liabilities within the Consolidated Balance Sheets was $5.9 million and $3.3 million as of December 29, 2018 and December 30, 2017, respectively.

The amount of unrecognized tax benefits at December 29, 2018 was $18.3 million. This total represents the net amount of tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. Of this amount, approximately $3.5 million may be recognized in 2019 based upon the possible lapse in the statute of limitations. None of the positions included in unrecognized tax benefits are related to tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.

The U.S. federal statute of limitations remains open for the Company for the 2014 tax year and later years, although the Company has been audited for the 2014 through 2016 tax years and the audit concluded in 2018 with no significant adjustments. The U.S. federal statute of limitations remains open for IXYS pre-acquisition tax periods ending March 31, 2016, March 31, 2017 and January 17, 2018. Non-U.S. and U.S. state statutes of limitations generally range from three to seven years, although certain jurisdictions do not have a statute expiration. Non-U.S. tax examinations occur from time to time, including examinations currently in process in Italy, the Philippines and Hong Kong. The company does not expect to recognize a significant amount of additional tax expense as a result of concluding these examinations.