Entity information:
INCOME TAXES

The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Act provides for numerous significant tax law changes and modifications including the reduction of the U.S. federal corporate income tax rate from 35% to 21%, the requirement for companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and the creation of new taxes on certain foreign sourced earnings. 

In accordance with accounting standard ASC 740 "Income Taxes", companies are required to recognize the tax law changes in the period of enactment. However, SAB 118 allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. As of December 31, 2017, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. 

The one-time transition tax is based on our total post-1986 earnings and profits (E&P) that we previously deferred from US income taxes. We recorded a provisional amount for the one-time transition tax of our foreign subsidiaries resulting in a reduction of net operating losses of $161.9 million. We have not finalized our calculation of total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of the post-1986 E&P previously deferred from US federal taxation and finalize the amounts held in cash or other specified assets. No additional income taxes and foreign withholding taxes have been provided for any remaining undistributed foreign earnings not subject to transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any remaining undistributed earnings not subject to the transition tax and additional outside basis difference in these entities (i.e., basis difference in excess of that subject to the one-time transition tax) is not practicable. 

As a result of the reduction of the corporate income tax rate to 21%, U.S. GAAP requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the period of enactment. The Company remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. The provisional amount recorded for the remeasurement and resulting write-down of the deferred tax balance was $246.4 million. The change in our deferred tax balances had a corresponding change to our valuation allowance thereby resulting in no income tax expense for the period. However, we are still analyzing aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. 

The geographic distribution of income (loss) from continuing operations before income taxes and equity earnings of unconsolidated investees and the components of provision for income taxes are summarized below:
 
 
Fiscal Year
(In thousands)
 
2017
 
2016
 
2015
Geographic distribution of income (loss) from continuing operations before income taxes and equity in earnings of unconsolidated investees:
 
 
 
 
 
 
U.S. income (loss)
 
(1,158,314
)
 
$
(696,232
)
 
$
(222,688
)
Non-U.S. income (loss)
 
41,250

 
131,637

 
(19,623
)
Income (loss) before income taxes and equity in earnings (loss) of unconsolidated investees
 
$
(1,117,064
)
 
$
(564,595
)
 
$
(242,311
)
Provision for income taxes:
 
 
 
 
 
 
Current tax benefit (expense)
 
 
 
 
 
 
Federal
 
$
6,815

 
$
(6,843
)
 
$
(43,676
)
State
 
6,575

 
9,254

 
(22,143
)
Foreign
 
(12,074
)
 
(19,073
)
 
(2,009
)
Total current tax expense
 
$
1,316

 
$
(16,662
)
 
$
(67,828
)
Deferred tax benefit (expense)
 
 
 
 
 
 
Federal
 
$
—

 
$
3,286

 
$
1,278

State
 
1,450

 
6,819

 
—

Foreign
 
1,177

 
(762
)
 
(144
)
Total deferred tax benefit (expense)
 
2,627

 
9,343

 
1,134

Benefit from (provision for) income taxes
 
$
3,943

 
$
(7,319
)
 
$
(66,694
)

The benefit (expense) for income taxes differs from the amounts obtained by applying the statutory U.S. federal tax rate to income before taxes as shown below:
 
 
Fiscal Year
(In thousands)
 
2017
 
2016
 
2015
Statutory rate
 
35
%
 
35
%
 
35
%
Tax benefit (expense) at U.S. statutory rate
 
$
390,973

 
$
197,608

 
$
84,809

Foreign rate differential
 
6,178

 
24,932

 
(9,676
)
State income taxes, net of benefit
 
(450
)
 
(329
)
 
(21,547
)
Return to provision adjustments
 
—

 
10,784

 
—

Deemed foreign dividend
 
—

 
—

 
(16,618
)
Tax credits (investment tax credit and other)
 
8,132

 
6,396

 
19,723

Change in valuation allowance
 
(117,060
)
 
(189,245
)
 
(164,236
)
Unrecognized tax benefits
 
2,430

 
(42,697
)
 
(20,634
)
Non-controlling interest income
 
17,705

 
17,183

 
14,353

Goodwill impairment
 
—

 
(20,236
)
 
—

Domestic production activity
 
—

 
—

 
10,262

Transfer Pricing Adjustment
 
—

 
—

 
(6,304
)
Intercompany profit deferral
 
—

 
(4,933
)
 
49,705

Effects of tax reform
 
(302,899
)
 
—

 
—

Other, net
 
(1,066
)
 
(6,782
)
 
(6,531
)
Total
 
$
3,943

 
$
(7,319
)
 
$
(66,694
)

 
 
As of
(In thousands)
 
December 31, 2017
 
January 1, 2017
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
160,778

 
$
209,431

Tax credit carryforwards
 
57,072

 
6,898

Reserves and accruals
 
194,035

 
187,250

Stock-based compensation stock deductions
 
11,160

 
24,357

Outside basis difference on investment in 8point3 Energy Partners
 
68,331

 
108,941

Basis difference on third-party project sales
 
247,488

 
148,636

Other
 
2,427

 
(331
)
Total deferred tax asset
 
741,291

 
685,182

Valuation allowance
 
(559,766
)
 
(497,236
)
Total deferred tax asset, net of valuation allowance
 
181,525

 
187,946

Deferred tax liabilities:
 
 
 
 
Foreign currency derivatives unrealized gains
 
—

 
(574
)
Other intangible assets and accruals
 
(8,257
)
 
(13,908
)
Fixed asset basis difference
 
(156,371
)
 
(149,380
)
Other
 
(8,252
)
 
(10,866
)
Total deferred tax liabilities
 
(172,880
)
 
(174,728
)
Net deferred tax asset
 
$
8,645

 
$
13,218


The Company remeasured these non-current assets and liabilities at the applicable U.S. federal tax rate of 21% in accordance with the Tax Cuts and Jobs Act of 2017. The remeasurement resulted in a total decrease in the gross deferred tax assets before valuation allowance of $246.4 million.

As of December 31, 2017, the Company had federal net operating loss carryforwards of $629.3 million for tax purposes. These federal net operating loss carryforwards will expire at various dates from 2028 to 2037. As of December 31, 2017, the Company had California state net operating loss carryforwards of approximately $524.7 million for tax purposes, of which $5.2 million relate to debt issuance and will benefit equity when realized. These California net operating loss carryforwards will expire at various dates from 2029 to 2037. The Company also had credit carryforwards of approximately $75.3 million for federal tax purposes, of which $19.0 million relate to debt issuance and will benefit equity when realized. The Company had California credit carryforwards of $9.0 million for state tax purposes, of which $4.7 million relate to debt issuance and will benefit equity when realized. These federal credit carryforwards will expire at various dates from 2019 to 2037, and the California credit carryforwards do not expire. The Company’s ability to utilize a portion of the net operating loss and credit carryforwards is dependent upon the Company being able to generate taxable income in future periods or being able to carryback net operating losses to prior year tax returns. The Company's ability to utilize net operating losses may be limited due to restrictions imposed on utilization of net operating loss and credit carryforwards under federal and state laws upon a change in ownership, such as the transaction with Cypress.

The Company is subject to tax holidays in the Philippines where it manufactures its solar power products. The Company's current income tax holidays were granted as manufacturing lines were placed in service. Tax holidays in the Philippines reduce the Company's tax rate to 0% from 30%. Tax savings associated with the Philippines tax holidays were approximately $5.6 million, $10.0 million, and $21.2 million in fiscal 2017, 2016, and 2015, respectively, which provided a diluted net income (loss) per share benefit of $0.04, $0.07, and $0.16, respectively.

The Company qualifies for the auxiliary company status in Switzerland where it sells its solar power products. The auxiliary company status entitles the Company to a reduced tax rate of 11.5% in Switzerland from approximately 24.2%. Tax savings associated with this ruling were approximately $2.4 million, $1.9 million, and $1.6 million in fiscal 2017, 2016, and 2015, respectively, which provided a diluted net income (loss) per share benefit of $0.02, $0.01, and $0.01 in fiscal 2017, 2016, and 2015, respectively.

The Company is subject to tax holidays in Malaysia where it manufactures its solar power products. The Company's current tax holidays in Malaysia were granted to its former joint venture AUOSP (now a wholly-owned subsidiary). Tax holidays in Malaysia reduce the Company’s tax rate to 0% from 24%. Tax savings associated with the Malaysia tax holiday were approximately $6.8 million and $2.0 million in fiscal 2017 and 2016, respectively, which provided a diluted net income (loss) per share benefit of $0.05 and $0.01 in fiscal 2017 and 2016, respectively.

Valuation Allowance

The Company’s valuation allowance is related to deferred tax assets in the United States, France, South Africa and Spain and was determined by assessing both positive and negative evidence. When determining whether it is more likely than not that deferred assets are recoverable, with such assessment being required on a jurisdiction by jurisdiction basis, management believes that sufficient uncertainty exists with regard to the realizability of these assets such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits, the lack of consistent profitability in the solar industry, the limited capacity of carrybacks to realize these assets, and other factors. Based on the absence of sufficient positive objective evidence, management is unable to assert that it is more likely than not that the Company will generate sufficient taxable income to realize net deferred tax assets aside from the U.S. net operating losses that can be carried back to prior year tax returns. Should the Company achieve a certain level of profitability in the future, it may be in a position to reverse the valuation allowance which would result in a non-cash income statement benefit. The change in valuation allowance for fiscal 2017, 2016, and 2015 was $63.0 million, $228.6 million, and $149.9 million, respectively.

Unrecognized Tax Benefits

Current accounting guidance contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits during fiscal 2017, 2016, and 2015 is as follows:

 
 
Fiscal Year
(In thousands)
 
2017
 
2016
 
2015
Balance, beginning of year
 
$
82,253

 
$
41,058

 
$
44,287

Additions for tax positions related to the current year
 
2,478

 
35,768

 
10,478

Additions (reductions) for tax positions from prior years
 
22,151

 
7,322

 
(12,545
)
Reductions for tax positions from prior years/statute of limitations expirations
 
(1,460
)
 
(2,063
)
 
(944
)
Foreign exchange (gain) loss
 
537

 
168

 
(218
)
Balance at the end of the period
 
$
105,959

 
$
82,253

 
$
41,058


Included in the unrecognized tax benefits at fiscal 2017 and 2016 is $17.6 million and $44.3 million, respectively that, if recognized, would result in a reduction of the Company's effective tax rate. The amounts differ from the long-term liability recorded of $19.4 million and $47.2 million as of fiscal 2017 and 2016 due to accrued interest and penalties. Certain components of the unrecognized tax benefits are recorded against deferred tax asset balances.

Management believes that events that could occur in the next 12 months and cause a change in unrecognized tax benefits include, but are not limited to, the following:

•
commencement, continuation or completion of examinations of the Company’s tax returns by the U.S. or foreign taxing authorities; and

•
expiration of statutes of limitation on the Company’s tax returns.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Uncertainties include, but are not limited to, the impact of legislative, regulatory and judicial developments, transfer pricing and the application of withholding taxes. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. Management determined that an estimate of the range of reasonably possible change in the amounts of unrecognized tax benefits within the next 12 months cannot be made.

Classification of Interests and Penalties

The Company accrues interest and penalties on tax contingencies which are classified as "Provision for income taxes" in the Consolidated Statements of Operations. Accrued interest as of December 31, 2017 and January 1, 2017 was approximately $1.8 million and $2.8 million, respectively. Accrued penalties were not material for any of the periods presented.

Tax Years and Examination

The Company files tax returns in each jurisdiction in which it is registered to do business. In the United States and many of the state jurisdictions, and in many foreign countries in which the Company files tax returns, a statute of limitations period exists. After a statute of limitations period expires, the respective tax authorities may no longer assess additional income tax for the expired period. Similarly, the Company is no longer eligible to file claims for refund for any tax that it may have overpaid. The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by these jurisdictions as of December 31, 2017:
Tax Jurisdictions
Tax Years
United States
2010 and onward
California
2011 and onward
Switzerland
2007 and onward
Philippines
2012 and onward
France
2012 and onward
Italy
2011 and onward

Additionally, certain pre-2010 U.S. corporate tax return and pre-2011 California tax returns are not open for assessment but the tax authorities can adjust net operating loss and credit carryovers that were generated.

The Company is under tax examinations in various jurisdictions. The Company does not expect the examinations to result in a material assessment outside of existing reserves. If a material assessment in excess of current reserves results, the amount that the assessment exceeds current reserves will be a current period charge to earnings.