Income Taxes
The income before income taxes summarized by region is as follows (in millions):
|
| | | | | | | | | | | |
| Years Ended |
| December 31,
2017 | | January 1,
2017 | | January 3,
2016 |
United States | $ | 458 |
| | $ | 120 |
| | $ | 218 |
|
Foreign | 585 |
| | 441 |
| | 365 |
|
Total income before income taxes | $ | 1,043 |
| | $ | 561 |
| | $ | 583 |
|
The provision for income taxes consists of the following (in millions):
|
| | | | | | | | | | | |
| Years Ended |
| December 31,
2017 | | January 1,
2017 | | January 3,
2016 |
Current: | |
| | |
| | |
|
Federal | $ | 259 |
| | $ | 71 |
| | $ | 106 |
|
State | 21 |
| | 10 |
| | 18 |
|
Foreign | 51 |
| | 45 |
| | 46 |
|
Total current provision | 331 |
| | 126 |
| | 170 |
|
Deferred: | |
| | |
| | |
|
Federal | 36 |
| | 16 |
| | (11 | ) |
State | — |
| | (5 | ) | | (32 | ) |
Foreign | (2 | ) | | (4 | ) | | (2 | ) |
Total deferred expense (benefit) | 34 |
| | 7 |
| | (45 | ) |
Total tax provision | $ | 365 |
| | $ | 133 |
| | $ | 125 |
|
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows (in millions):
|
| | | | | | | | | | | |
| Years Ended |
| December 31,
2017 | | January 1,
2017 | | January 3,
2016 |
Tax at federal statutory rate | $ | 365 |
| | $ | 196 |
| | $ | 204 |
|
State, net of federal benefit | 19 |
| | 10 |
| | 9 |
|
Research and other credits | (12 | ) | | (13 | ) | | (20 | ) |
Change in valuation allowance | 12 |
| | 5 |
| | (4 | ) |
Impact of foreign operations | (130 | ) | | (86 | ) | | (42 | ) |
Cost sharing adjustment | — |
| | (7 | ) | | (25 | ) |
Investments in consolidated variable interest entities | (3 | ) | | 25 |
| | 1 |
|
Impact of U.S. Tax Reform | 150 |
| | — |
| | — |
|
Stock compensation | (41 | ) | | 3 |
| | 2 |
|
Other | 5 |
| | — |
| | — |
|
Total tax provision | $ | 365 |
| | $ | 133 |
| | $ | 125 |
|
In accordance with the Tax Cuts and Jobs Act that was enacted on December 22, 2017 (U.S. Tax Reform), we have recorded a provision for income taxes of $150 million. The impact of U.S. Tax Reform primarily represents our provisional estimates of the one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and the impact of revaluing our U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. For U.S. federal purposes the corporate statutory income tax rate was reduced from 35% to 21%, effective for our 2018 tax year. The provisional impact of U.S. Tax Reform is our current best estimate based on a preliminary review of the new law and is subject to revision based on our existing accounting for income taxes policy as further information is gathered and interpretation and analysis of the tax legislation evolves. The Securities and Exchange Commission has issued rules allowing for a measurement period of up to one year after the enactment date of U.S. Tax Reform to finalize the recording of the related tax impacts. Any future changes to our provisional estimated impact of U.S. Tax Reform will be included as an adjustment to the provision for income taxes.
We continue to evaluate the impacts of U.S. Tax Reform as we interpret the legislation, including the newly enacted global intangible low-taxed income (GILTI) provisions which subject our foreign earnings to a minimum level of tax. Because of the complexities of the new legislation, we have not elected an accounting policy for GILTI at this time. Recent FASB guidance indicates that accounting for GILTI either as part of deferred taxes or as a period cost are both acceptable methods. Once further information is gathered and interpretation and analysis of the tax legislation evolves we will make an appropriate accounting method election.
The impact of foreign operations primarily represents the difference between the actual provision for income taxes for our legal entities that operate primarily in jurisdictions that have statutory tax rates lower than the U.S. federal statutory tax rate of 35%. The most significant tax benefits from foreign operations were from our earnings in Singapore and the United Kingdom, which had statutory tax rates of 17% and 19.25%, respectively, in the year ended December 31, 2017. The impact of foreign operations also includes the U.S. foreign tax credit impact of non-U.S. earnings and uncertain tax positions related to foreign items.
Significant components of deferred tax assets and liabilities are as follows (in millions):
|
| | | | | | | |
| December 31,
2017 | | January 1,
2017 |
Deferred tax assets: | |
| | |
|
Net operating losses | $ | 18 |
| | $ | 20 |
|
Tax credits | 57 |
| | 43 |
|
Other accruals and reserves | 25 |
| | 24 |
|
Stock compensation | 19 |
| | 38 |
|
Deferred rent | 28 |
| | 38 |
|
Cost sharing adjustment | 21 |
| | 32 |
|
Other amortization | 12 |
| | 16 |
|
Lease obligation | 27 |
| | — |
|
Investments | 13 |
| | 6 |
|
Other | 26 |
| | 32 |
|
Total gross deferred tax assets | 246 |
| | 249 |
|
Valuation allowance on deferred tax assets | (25 | ) | | (18 | ) |
Total deferred tax assets | 221 |
| | 231 |
|
Deferred tax liabilities: | |
| | |
|
Purchased intangible amortization | (26 | ) | | (53 | ) |
Convertible debt | (18 | ) | | (37 | ) |
Property and equipment | (44 | ) | | (17 | ) |
Investments | (40 | ) | | — |
|
Other | (5 | ) | | (1 | ) |
Total deferred tax liabilities | (133 | ) | | (108 | ) |
Deferred tax assets, net | $ | 88 |
| | $ | 123 |
|
A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Based on the available evidence as of December 31, 2017, we were not able to conclude it is more likely than not certain deferred tax assets will be realized. Therefore, a valuation allowance of $25 million was recorded against certain U.S. and foreign deferred tax assets.
As of December 31, 2017, we had net operating loss carryforwards for federal and state tax purposes of $10 million and $136 million, respectively, which will begin to expire in 2019 and 2018, respectively, unless utilized prior. We also had state tax credit carryforwards of $95 million, which will begin to expire in 2022, unless utilized prior.
Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 31, 2017 are net of any previous limitations due to Section 382 and 383.
Our manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. These tax holidays and incentives resulted in a $49 million, $32 million, and $23 million decrease to the provision for income taxes for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. These tax holidays and incentives resulted in an increase in diluted earnings per share attributable to Illumina stockholders of $0.33, $0.22, and $0.16, for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.
It is our intention to indefinitely reinvest the historical earnings of our foreign subsidiaries generated prior to 2017 to ensure sufficient working capital and to expand existing operations outside the United States. Accordingly, U.S. and foreign income and withholding taxes have not been provided on $1.1 billion of undistributed earnings of foreign subsidiaries as of December 31, 2017. In the event we are required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences. For the year ended December 31, 2017, we asserted that $869 million of foreign earnings generated in 2017 would not be indefinitely reinvested, and accordingly, recorded a deferred tax liability of $5 million.
The following table summarizes the gross amount of our uncertain tax positions (in millions):
|
| | | | | | | | | | | |
| December 31,
2017 | | January 1,
2017 | | January 3,
2016 |
Balance at beginning of year | $ | 65 |
| | $ | 56 |
| | $ | 52 |
|
Increases related to prior year tax positions | 2 |
| | — |
| | 2 |
|
Decreases related to prior year tax positions | — |
| | (2 | ) | | (1 | ) |
Increases related to current year tax positions | 14 |
| | 13 |
| | 11 |
|
Decreases related to lapse of statute of limitations | (2 | ) | | (2 | ) | | (8 | ) |
Balance at end of year | $ | 79 |
| | $ | 65 |
| | $ | 56 |
|
Included in the balance of uncertain tax positions as of December 31, 2017 and January 1, 2017, were $70 million and $55 million, respectively, of net unrecognized tax benefits that, if recognized, would reduce the effective income tax rate in future periods.
Any interest and penalties related to uncertain tax positions are reflected in the provision for income taxes. We recognized expense of $1 million, expense of $1 million, and income of $0.2 million during the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively, related to potential interest and penalties on uncertain tax positions. We recorded a liability for potential interest and penalties of $8 million and $6 million as of December 31, 2017 and January 1, 2017, respectively.
Tax years 1997 to 2016 remain subject to future examination by the major tax jurisdictions in which we are subject to tax. Given the uncertainty of potential adjustments from examination as well as the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could change significantly over the next 12 months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be determined given the number of matters and the number of years that are potentially subject to examination.