Note 11 Income Tax

12 Months Ended

Sep. 28, 2019

Income Taxes

Domestic and foreign components of income before income taxes were as follows:



	Year Ended
	September 28, 2019		September 29, 2018		September 30, 2017
	(In thousands)
Domestic	$	153,696	$	16,215	$	128,493
Foreign	91,923		81,324		84,987
Total	$	245,619	$	97,539	$	213,480

The provision for income taxes consists of the following:



	Year Ended
	September 28, 2019		September 29, 2018			September 30, 2017
	(In thousands)
Federal:
Current	$	868	$	(122	)	$	(2,524	)
Deferred	45,910		170,994			37,543
State:
Current	2,747		32			1,648
Deferred	2,961		(3,672		)	4,204
Foreign:
Current	45,929		20,287			37,076
Deferred	5,689		5,553			(3,300		)
Total provision for income taxes	$	104,104	$	193,072		$	74,647

Impact of U.S. Tax Reform

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. In accordance with ASC 740, Income Taxes, the Company is required to recognize the effect of the Tax Act in the period of enactment, which was the Company’s first quarter of fiscal 2018 that ended on December 30, 2017. The many changes in the Tax Act include a permanent reduction in the maximum federal corporate income tax rate from 35% to 21% effective as of January 1, 2018. Because of this reduction in rate, the Company was required to revalue its U.S. deferred tax assets and liabilities to the new rate in the Company's first quarter of 2018. The Tax Act also required a mandatory deemed repatriation of undistributed earnings and profits, at the rate of either 15.5% for cash or 8% for non-liquid assets.

The Tax Act also includes provisions for Global Intangible Low-Taxed Income (“GILTI”), which imposes taxes on foreign income in excess of a deemed return on tangible assets of foreign corporations. These new provisions were effective for the Company in fiscal year 2019. During the first quarter of 2019, the Company elected to record the effects of GILTI as a period cost.

The Company's provision for income taxes for 2019, 2018 and 2017 was $104 million (42% of income before taxes), $193 million (198% of income before taxes) and $75 million (35% of income before taxes), respectively. Income tax expense for 2019 is higher than the expected U.S. statutory rate primarily due to a tax-related restructuring transaction that resulted in deferred tax expense of $22 million and foreign operations that resulted in higher tax than the U.S. statutory rate.

During 2018, the Company recorded a net income tax expense for the impact of the Tax Act of $161 million, which was comprised of $175 million for remeasurement of the Company’s U.S deferred tax assets, zero for the mandatory deemed repatriation of undistributed earnings and profits, and a tax benefit of $14 million for the conversion to a territorial system.

During the first quarter of 2017, the Company recorded a discrete tax benefit resulting from the merger of two foreign entities, the surviving entity of which was, and continues to be, included in the Company’s U.S. federal consolidated tax group. This restructuring allowed the Company to recognize a U.S. deferred tax asset to reflect the federal deductibility of a foreign uncertain tax position that became recognizable upon the merger of the subsidiaries.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:



	As of
	September 28, 2019			September 29, 2018
	(In thousands)
Deferred tax assets:
U.S. net operating loss carryforwards	$	184,188		$	218,710
Foreign net operating loss carryforwards	117,403			129,866
Intangibles	19,422			15,099
Accruals not currently deductible	45,117			45,922
Property, plant and equipment	28,710			22,596
Tax credit carryforwards	13,601			13,825
Reserves not currently deductible	15,266			14,420
Stock compensation expense	10,249			13,645
Federal benefit of foreign operations	14,006			7,104
Other	5,889			5,934
Valuation allowance	(115,998		)	(113,559		)
Total deferred tax assets	337,853			373,562
Deferred tax liabilities on undistributed earnings	(18,690		)	(23,986		)
Deferred tax liabilities on branch operations	(34,378		)	(10,906		)
Other deferred tax liabilities	(9,456		)	—
Net deferred tax assets	$	275,329		$	338,670
Recorded as:
Non-current deferred tax assets	$	279,803		$	344,124
Non-current deferred tax liabilities	(4,474		)	(5,454		)
Net deferred tax assets	$	275,329		$	338,670

The Company offsets deferred tax assets and liabilities by tax-paying jurisdiction. The resulting net amounts by tax jurisdiction are then aggregated without further offset.

A valuation allowance is established or maintained when, based on currently available information and other factors, it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company regularly assesses its valuation allowance against deferred tax assets on a jurisdiction by jurisdiction basis. The Company considers all available positive and negative evidence, including future reversals of temporary differences, projected future taxable income, tax planning strategies and recent financial results. Significant judgment is required in assessing the Company's ability to generate revenue, gross profit, operating income and jurisdictional taxable income in future periods. The Company's valuation allowance as of September 28, 2019 relates primarily to foreign net operating losses, with the exception of $15 million related to U.S.

state net operating losses.

As of September 28, 2019, income taxes and foreign withholding taxes have not been provided for approximately $420 million of cumulative undistributed earnings of several non-U.S. subsidiaries. The Company intends to reinvest these earnings indefinitely in operations outside of the U.S. Determination of the amount of unrecognized deferred tax liabilities on these undistributed earnings is not practicable.

As of September 28, 2019, the Company has cumulative net operating loss carryforwards for federal, state and foreign tax purposes of $770 million, $407 million and $520 million, respectively. The federal and state net operating loss carryforwards begin expiring in 2025 and 2020, respectively, and expire at various dates through 2035. Certain foreign net operating losses start expiring in 2020. However, the majority of foreign net operating losses carryforward indefinitely. The Tax Reform Act of 1986 and similar state provisions impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” as defined in the Internal Revenue Code. The utilization of certain net operating losses may be restricted due to changes in ownership and business operations. Prior to the adoption of ASU 2016-09, the Company was prohibited from recognizing a deferred tax asset for excess tax benefits related to stock and stock option plans that have not been realized through the reduction in income taxes payable. Such unrecognized deferred tax benefit as of September 30, 2017 was $124 million on a pre-tax basis and was recognized upon the Company’s adoption of ASU 2016-09, Improvements to Employee Share-based Accounting, in 2018 with a corresponding increase to retained earnings.

Following is a reconciliation of the statutory federal tax rate to the Company's effective tax rate:



	Year Ended
	September 28, 2019		September 29, 2018		September 30, 2017
Federal tax at statutory tax rate	21.00	%	24.50	%	35.00	%
Tax Act impact	—		165.16		—
Effect of foreign operations	9.30		7.92		1.89
Permanent items	0.40		(1.37	)	2.10
Discrete charge for restructuring transaction	8.88		—		—
Discrete benefit of foreign restructuring	—		—		(4.92	)
Other	0.61		0.49		(1.84	)
State income taxes, net of federal benefit	2.19		1.24		2.72
Effective tax rate	42.38	%	197.94	%	34.95	%

A reconciliation of the beginning and ending amount of total unrecognized tax benefits, excluding accrued penalties and interest, is as follows:



	Year Ended
	September 28, 2019			September 29, 2018			September 30, 2017
	(In thousands)
Balance, beginning of year	$	60,787		$	67,022		$	55,773
Increase (decrease) related to prior year tax positions	(1,731		)	(5,917		)	1,670
Increase related to current year tax positions	8,902			8,392			9,741
Settlements	(626		)	(7,648		)	—
Decrease related to lapse of applicable statute of limitations	(655		)	(1,062		)	(162		)
Balance, end of year	$	66,677		$	60,787		$	67,022

The Company had reserves of $39 million and $38 million as of September 28, 2019 and September 29, 2018, respectively, for the payment of interest and penalties relating to unrecognized tax benefits. During 2019, the Company recognized a net income tax expense for interest and penalties of $1 million compared to a net income tax benefit of $3 million in 2018 and a net income tax expense of $4 million in 2017. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. Should the Company be able to ultimately recognize all of these uncertain tax positions, it would result in a benefit to net income and a reduction of the effective tax rate.

The Company conducts business globally and, as a result, files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination

by taxing authorities throughout the world. The Company is currently being audited by the Internal Revenue Service for tax years 2008 through 2010. To the extent the final tax liabilities are different from the amounts accrued, this would result in an increase or decrease in net operating loss carryforwards which would impact tax expense. Additionally, the Company is being audited by various state tax agencies and certain foreign countries. To the extent the final tax liabilities are different from the amounts accrued, the increases or decreases would be recorded as income tax expense or benefit in the consolidated statements of operations. Although the Company believes that the resolution of these audits will not have a material adverse impact on the Company’s results of operations, the outcome is subject to uncertainty.

In general, the Company is no longer subject to United States federal or state income tax examinations for years before 2003, and to foreign examinations for years prior to 2003 in its major foreign jurisdictions. Although the timing of the resolution of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years subject to audit and the number of matters being examined, the Company is unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.