Income Taxes
The following is a geographic breakdown of the provision for (benefit from) income taxes (in thousands):
|
| | | | | | | | | | | |
| Years Ended |
| December 30, 2017 | | December 31,
2016 | | December 26,
2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | 32 |
| | $ | — |
|
State | 69 |
| | 861 |
| | 1,239 |
|
Foreign | 4,679 |
| | 2,288 |
| | 3,482 |
|
Total current | $ | 4,748 |
| | $ | 3,181 |
| | $ | 4,721 |
|
Deferred: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State | — |
| | — |
| | — |
|
Foreign | (6,178 | ) | | (7,932 | ) | | (3,640 | ) |
Total deferred | $ | (6,178 | ) | | $ | (7,932 | ) | | $ | (3,640 | ) |
Total provision (benefit) | $ | (1,430 | ) | | $ | (4,751 | ) | | $ | 1,081 |
|
Loss before provision for income taxes from international operations was $22.6 million, $23.1 million and $6.3 million, respectively, for the years ended December 30, 2017, December 31, 2016 and December 26, 2015.
The provisions for (benefit from) income taxes differ from the amount computed by applying the statutory federal income tax rates as follows:
|
| | | | | | | | |
| Years Ended |
| December 30,
2017 | | December 31,
2016 | | December 26,
2015 |
Expected tax (benefit) at federal statutory rate | (35.0 | )% | | (35.0 | )% | | 35.0 | % |
State taxes, net of federal benefit | — | % | | 2.2 | % | | 1.5 | % |
Research credits | (1.8 | )% | | (8.9 | )% | | (5.0 | )% |
Stock-based compensation | 6.0 | % | | 22.3 | % | | 9.6 | % |
Change in valuation allowance | 26.8 | % | | (5.9 | )% | | (43.0 | )% |
Foreign rate differential | 3.3 | % | | 9.4 | % | | 4.0 | % |
Other | — | % | | (0.4 | )% | | — | % |
Effective tax rate | (0.7 | )% | | (16.3 | )% | | 2.1 | % |
The Company recognized an income tax benefit of $1.4 million on a loss before income taxes of $195.9 million, income tax benefit of $4.8 million on a loss before income taxes of $29.2 million and income tax expense of $1.1 million on income before income taxes of $52.0 million in fiscal years 2017, 2016 and 2015, respectively. The resulting effective tax rates were (0.7)%, (16.3)% and 2.1% for 2017, 2016 and 2015, respectively. The 2017 and 2016 effective tax rates differ from the expected statutory rate of 35% based on the Company's ability to benefit U.S. loss carryforwards, offset by state income taxes, non-deductible stock-based compensation expenses and foreign taxes provided on foreign subsidiary earnings. The lower 2017 income tax benefit compared to the 2016 income tax benefit primarily relates to a lower acquisition related amortization expenses and lower state income taxes offset by an increase in tax reserves, and taxable foreign profits in certain jurisdictions. The tax benefit for 2016 compared to tax expense in 2015 is primarily due to acquisition related amortization expenses and charges lower state taxes, and reduction in tax reserves, offset by an increase in taxable foreign profits.
Because of the Company's U.S. operating loss in 2017 and significant loss carryforward position with a corresponding full valuation allowance in 2016 and 2015, it has not been subject to federal or state tax on U.S. income because of the availability of loss carryforwards, with the exception of amounts for certain states’ taxes for which the losses are limited by statute or amount in 2016 and more significantly in 2015, and federal and state taxes associated with a discontinued US subsidiary. If these losses and other tax attributes become fully utilized, taxes will increase significantly to a more normalized, expected rate on U.S. earnings. The release of transfer pricing reserves in the future will have a beneficial impact to tax expense, but the timing of the impact depends on factors such as expiration of the statute of limitations or settlements with tax authorities.
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering the federal corporate income tax rate from 35% to 21% effective January 1, 2018, while also imposing a repatriation tax on deemed repatriated earnings of the Company's foreign subsidiaries in 2017, and implementing a quasi-territorial tax system on future foreign earnings.
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance, which resulted in no tax expense recorded in connection with the re-measurement of certain deferred tax assets and liabilities from 35% to 21% to reflect the new corporate tax rate. Additionally, the Company has provisionally recorded no tax expense in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an aggregate tax loss of its foreign subsidiaries, as a reasonable estimate at December 30, 2017. Additional work may be necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings. Any subsequent adjustment to these amounts will be recorded in 2018 when the analysis is complete.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows, reduced by the effects of the change in the U.S. corporate tax rate from 35% to 21%, as applicable (in thousands):
|
| | | | | | | |
| Years Ended |
| December 30, 2017 | | December 31,
2016 |
Deferred tax assets: | | | |
Net operating losses | $ | 66,122 |
| | $ | 77,670 |
|
Research and foreign tax credits | 74,434 |
| | 47,405 |
|
Nondeductible accruals | 28,801 |
| | 42,507 |
|
Inventory valuation | 29,197 |
| | 30,449 |
|
Property, plant and equipment | 1,919 |
| | 1,692 |
|
Intangible assets | 3 |
| | 119 |
|
Stock-based compensation | 6,325 |
| | 9,412 |
|
Total deferred tax assets | $ | 206,801 |
| | $ | 209,254 |
|
Valuation allowance | (205,241 | ) | | (200,476 | ) |
Net deferred tax assets | $ | 1,560 |
| | $ | 8,778 |
|
Deferred tax liabilities: | | | |
Depreciation | (67 | ) | | (239 | ) |
Accruals, reserves and prepaid expenses | (1,154 | ) | | (4,008 | ) |
Acquired intangible assets | (20,348 | ) | | (24,088 | ) |
Convertible senior notes | (1,191 | ) | | (5,653 | ) |
Total deferred tax liabilities | $ | (22,760 | ) | | $ | (33,988 | ) |
Net deferred tax liabilities | $ | (21,200 | ) | | $ | (25,210 | ) |
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company must consider all positive and negative evidence, including the Company's forecasts of taxable income over the applicable carryforward periods, its current financial performance, its market environment, and other factors in evaluating the need for a full or partial valuation allowance against its net U.S. deferred tax assets. Based on the available objective evidence, management believes it is not more likely than not that the domestic net deferred tax assets will be realizable in the foreseeable future. Accordingly, the Company has provided a full valuation allowance against its domestic deferred tax assets, net of deferred tax liabilities, as of December 30, 2017 and December 31, 2016. The net deferred tax assets and full valuation allowance thereon as of December 30, 2017 reflects a reduction of approximately $66.1 million due to a lower effective tax rate under the Tax Act.
To the extent that the Company determines that deferred tax assets are realizable on a more likely than not basis, and an adjustment is needed, that adjustment will be recorded in the period that the determination is made and would generally decrease the valuation allowance and record a corresponding benefit to earnings.
As of December 30, 2017, the Company has net operating loss carryforwards of approximately $273.1 million for federal tax purposes and $138.8 million for state tax purposes. The carryforward balance reflects expected generation of both federal and state net operating losses for the year ended December 30, 2017. Federal net operating loss carryforwards will begin to expire in 2025 while certain unutilized California losses have expired in 2017. Additionally, the Company has federal research and development and foreign tax credits, and California research and development credits available to reduce future income taxes payable of approximately $52.6 million and $43.2 million, respectively, as of December 30, 2017. Infinera Canada Inc., an indirect wholly owned subsidiary, has Scientific Research and Experimental Development Expenditures (“SRED”) credits available of $2.7 million to offset future Canadian income tax payable as of December 30, 2017. Federal credits will begin to expire in the year 2022 if not utilized and California research credits have no expiration date. Canadian SRED credits will begin to expire in the year 2030 if not fully utilized.
Under the Tax Reform Act of 1986, the amount of benefit from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50 percent as defined over a three-year testing period. As of December 30, 2017, the Company had determined that while ownership changes had occurred in the past, the resulting limitations were not significant enough to impact the utilization of the tax attributes against its taxable profits earned to date.
Prior to the enactment of the Tax Act, the Company’s policy with respect to undistributed foreign subsidiaries’ earnings was to consider those earnings to be indefinitely reinvested. Under the Tax Act, undistributed earnings of foreign subsidiaries are deemed to be repatriated for U.S. corporate tax purposes and a one-time toll tax at a reduced U.S. corporate tax rate is applicable in 2017. However, because of the aggregated net tax loss of our foreign subsidiaries, no tax is accruable in 2017. If and when funds are actually distributed in the form of dividends or otherwise, foreign withholding taxes may be applicable in some jurisdictions. The Company's policy with respect to certain undistributed foreign subsidiaries’ earnings is to continue to consider those earnings to be indefinitely reinvested and therefore the Company has not accrued such withholding taxes.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):
|
| | | | | | | | | | | |
| December 30, 2017 | | December 31,
2016 | | December 26,
2015 |
Beginning balance | $ | 22,282 |
| | $ | 19,130 |
| | $ | 16,978 |
|
Tax position related to current year | | | | | |
Additions | 2,234 |
| | 2,548 |
| | 2,891 |
|
Tax positions related to prior years | | | | | |
Additions | — |
| | 1,292 |
| | — |
|
Reductions | (4,728 | ) | | — |
| | (497 | ) |
Lapses of statute of limitations | (2 | ) | | (688 | ) | | (242 | ) |
Ending balance | $ | 19,786 |
| | $ | 22,282 |
| | $ | 19,130 |
|
As of December 30, 2017, the cumulative unrecognized tax benefit was $19.8 million, of which $16.9 million was netted against deferred tax assets, which would have otherwise been subjected with a full valuation allowance. Of the total unrecognized tax benefit as of December 30, 2017, approximately $2.9 million, if recognized, would impact the Company’s effective tax rate.
As of December 30, 2017, December 31, 2016 and December 26, 2015, the Company had $0.7 million, $0.5 million and $0.5 million, respectively, of accrued interest or penalties related to unrecognized tax benefits, of which less than $0.2 million was included in the Company’s provision for income taxes in each of the years ended December 30, 2017, December 31, 2016 and December 26, 2015, respectively.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes.
The Company is potentially subject to examination by the Internal Revenue Service and the relevant state income taxing authorities under the statute of limitations for years 2002 and forward.
The Company has received assessments of tax resulting from transfer pricing examinations in India for most years in the range of fiscal years ending March 2005 through March 2014. While some of the assessment years have been settled with no change from the original tax return position, the Company intends to appeal all remaining assessment years, and does not expect a significant adjustment to unrecognized tax benefits as a result of these inquiries. The Company believes that the resolution of these disputed issues will not have a material impact on our financial statements.
Included in the balance of income tax liabilities, accrued interest and penalties at December 30, 2017 is $0.4 million related to tax positions for which it is reasonably possible that the statute of limitations will expire in various jurisdictions within the next twelve months.