9. Income Taxes
The following table presents the provision for (benefit from) income taxes and the effective tax rates:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Loss before income taxes |
|
$ |
(85,619 |
) |
|
$ |
(146,212 |
) |
|
$ |
(15,378 |
) |
|
Provision for (benefit from) income taxes |
|
|
(16,760 |
) |
|
|
997 |
|
|
|
1,682 |
|
|
Effective tax rate |
|
|
19.6 |
% |
|
|
(0.7 |
)% |
|
|
(10.9 |
)% |
On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act (the “Act”), which significantly changes the existing U.S. tax laws. Major reforms in the legislation include reduction in the corporate tax rate from 35.0% to 21.0% and a move from a worldwide tax system to a territorial system. As a result of enactment of the legislation, we recognized a tax benefit of $11.6 million in our consolidated statement of operations for the year ended December 31, 2017 primarily due to reduction of our net long-term deferred tax liabilities recorded on the Company’s consolidated balance sheet. The changes included in the Act are broad and complex. The final transition impacts of the Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Act, any legislative action to address questions that arise because of the Act, any changes in accounting standards for income taxes or related interpretations in response to the Act, or any updates or changes to estimates that the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates, cumulative unrepatriated foreign earnings and foreign exchange rates of foreign subsidiaries. The SEC has issued guidance that would allow for a measurement period of up to one year after the enactment date of the Act to finalize the recording of the related tax impacts. Any adjustments to these provisional amounts will be reported as a component of income tax expense or benefit in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.
The benefit from income taxes for the year ended December 31, 2017 was mainly due to the income tax benefit as a result of the Act as discussed above, a release of the unrecognized tax benefit liability of $5.2 million mainly due to the expiration of the statutes of limitations and a partial release of the valuation allowance on net deferred tax assets of $2.4 million due to the increase in taxable income as a result of the reclassification of an indefinite-lived to a finite-lived intangible asset. These tax benefits were partially offset by the provision for income taxes on earnings in foreign jurisdictions. The provision for income taxes for the years ended December 31, 2016 and 2015 were primarily related to tax on earnings in foreign jurisdictions.
As a result of the QLogic acquisition, during the third quarter of 2016, the Company recognized a net deferred tax liability mainly related to book-tax basis difference on purchased intangible assets. This net deferred tax liability was treated as a source of taxable income to support the realizability of the Company’s pre-existing deferred tax assets. As such, the Company recorded a partial release of its net deferred tax assets valuation allowance of $82.9 million to offset against the deferred tax liability. However, during the fourth quarter of 2016, the Company was able to assess and measure an additional deferred tax asset that existed as of the acquisition date of QLogic. Due to the identification of this additional deferred tax asset, the Company made adjustments in the fourth quarter of 2016 to certain tax balances including the reversal of the partial release of the valuation allowance recorded in the third quarter of 2016.
The domestic and foreign components of income (loss) before income tax expense were as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Domestic |
|
$ |
(104,659 |
) |
|
$ |
(147,752 |
) |
|
$ |
(37,109 |
) |
|
Foreign |
|
|
19,040 |
|
|
|
1,540 |
|
|
|
21,731 |
|
|
|
|
$ |
(85,619 |
) |
|
$ |
(146,212 |
) |
|
$ |
(15,378 |
) |
The provision for (benefit from) income taxes consists of the following:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Current tax provision (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(5,059 |
) |
|
$ |
51 |
|
|
$ |
(15 |
) |
|
Foreign |
|
|
4,945 |
|
|
|
3,084 |
|
|
|
1,034 |
|
|
|
|
|
(114 |
) |
|
|
3,135 |
|
|
|
1,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
(11,755 |
) |
|
|
775 |
|
|
|
564 |
|
|
Foreign |
|
|
(4,891 |
) |
|
|
(2,913 |
) |
|
|
99 |
|
|
|
|
|
(16,646 |
) |
|
|
(2,138 |
) |
|
|
663 |
|
|
Provision for (benefit from) income taxes |
|
$ |
(16,760 |
) |
|
$ |
997 |
|
|
$ |
1,682 |
|
The Company’s effective tax rate differs from the United States federal statutory rate as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income tax at statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Stock compensation costs |
|
|
5.1 |
|
|
|
(2.9 |
) |
|
|
(13.1 |
) |
|
Enactment of U.S. tax reform |
|
|
(60.0 |
) |
|
|
- |
|
|
|
- |
|
|
State taxes, net of federal benefit |
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
Foreign income inclusion in the United States |
|
|
(1.1 |
) |
|
|
6.8 |
|
|
|
(4.9 |
) |
|
Research and development credits |
|
|
8.9 |
|
|
|
4.1 |
|
|
|
42.6 |
|
|
Foreign tax rate differential |
|
|
7.7 |
|
|
|
(32.1 |
) |
|
|
41.5 |
|
|
Change in valuation allowance |
|
|
19.3 |
|
|
|
(9.7 |
) |
|
|
(111.8 |
) |
|
U.S. federal release related to expiration of statute of limitations |
|
|
4.9 |
|
|
|
- |
|
|
|
- |
|
|
Other |
|
|
(0.4 |
) |
|
|
(1.8 |
) |
|
|
(0.1 |
) |
|
Total |
|
|
19.6 |
% |
|
|
(0.7 |
)% |
|
|
(10.9 |
)% |
On July 27, 2015, the United States Tax Court in Altera Corp. v. Commissioner, 145 T.C. No. 3 (2015) issued an opinion with respect to Altera’s litigation with the Internal Revenue Service, concerning the treatment of stock-based compensation expense in an inter-company cost sharing arrangement. In ruling in favor of Altera, the Tax Court invalidated the portion of the Treasury regulations requiring the inclusion of stock-based compensation expense in such inter-company cost-sharing arrangements. Accordingly, the Company adjusted its inter-company arrangement to reflect the recent ruling in 2015. QLogic had a similar global structure prior to the acquisition and had not adjusted its inter-company arrangement to exclude stock-based compensation expense. In July 2017, as part of a global restructuring and legal entity realignment, the Company executed a harmonized inter-company cost sharing arrangement and continued to exclude stock-based compensation expense under the Tax Court’s opinion issued in July 2015 on a consolidated basis. There was no material impact on the Company’s consolidated financial statements as of and for the year ended December 31, 2017 considering the full valuation allowance on the Company’s federal and state net deferred tax assets.
Effective January 1, 2017 the Company adopted the updated guidance on stock-based compensation. Under the new guidance, all excess tax benefits and tax deficiencies are recognized in the income statement as they occur.
The tax effects of the temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
As of December 31, |
|
|||||
|
|
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
|
|
(in thousands) |
|
|||||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
Tax credits |
|
|
|
$ |
107,690 |
|
|
$ |
77,569 |
|
|
Net operating loss carryforwards |
|
|
|
|
215,336 |
|
|
|
257,286 |
|
|
Capitalized research and development |
|
|
|
|
8,365 |
|
|
|
15,077 |
|
|
Depreciation and amortization |
|
|
|
|
1,993 |
|
|
|
389 |
|
|
Stock compensation |
|
|
|
|
9,546 |
|
|
|
14,372 |
|
|
Other |
|
|
|
|
17,643 |
|
|
|
9,887 |
|
|
Gross deferred tax assets |
|
|
|
|
360,573 |
|
|
|
374,580 |
|
|
Less: valuation allowance |
|
|
|
|
(326,114 |
) |
|
|
(315,915 |
) |
|
Net deferred tax assets |
|
|
|
|
34,459 |
|
|
|
58,665 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
|
|
(36,108 |
) |
|
|
(55,788 |
) |
|
Unremitted foreign earnings |
|
|
|
|
- |
|
|
|
(21,171 |
) |
|
Net deferred tax liabilities |
|
|
|
$ |
(1,649 |
) |
|
$ |
(18,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported As |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
|
$ |
1,037 |
|
|
$ |
480 |
|
|
Deferred tax liabilities |
|
|
|
|
(2,686 |
) |
|
|
(18,774 |
) |
|
Net deferred tax liabilities |
|
|
|
$ |
(1,649 |
) |
|
$ |
(18,294 |
) |
As of December 31, 2017, the Company had total net operating loss carryforwards for federal and states of California and Massachusetts income tax purposes of $1,096.0 million and $562.6 million, respectively. If not utilized, these federal and state net operating loss carryforwards will expire beginning in 2020 and 2018, respectively. Effective January 1, 2017, the Company adopted the updated guidance on stock-based compensation, the Company recognized deferred tax assets of $101.7 million for the excess tax benefits that arose directly from tax deductions related to equity compensation greater than the amounts recognized for financial reporting and also recognized an increase of an equal amount in the valuation allowance against those deferred tax assets.
As of December 31, 2017, the Company also had federal and state research and development tax credit carryforwards of approximately $69.2 million and $83.4 million, respectively. The federal and state tax credit carryforwards will expire commencing 2020 and 2018, respectively, except for the California research tax credits which carry forward indefinitely. The Company also has various foreign and alternative minimum tax credits of approximately $3.7 million.
The Company’s net deferred tax assets relate predominantly to its United States tax jurisdiction. A full valuation allowance against the Company’s federal and state net deferred tax assets has been in place since 2012. The Company periodically evaluates the realizability of its net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on the Company's ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. The Company weighed both positive and negative evidence and determined that there is a continued need for a valuation allowance on its federal and state deferred tax assets as December 31, 2017 and 2016.
The Company reviews whether the utilization of its net operating losses and research credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Utilization of these carryforwards is restricted and results in some amount expiring prior to benefiting the Company. The deferred tax assets shown above have been adjusted to reflect these expiring carryforwards.
The Company continues to repatriate cash from certain offshore operations in accordance with management’s review of the Company’s cash position and anticipated cash needs for investment in the Company’s core business, including interest charges and principal prepayments to the Company’s outstanding Term Loan Facility. The Company has changed its assertion regarding the repatriation of cash during the second quarter of 2017 in that the current and future earnings of certain foreign entities will no longer be indefinitely reinvested, and that the Company provides deferred taxes for the anticipated income taxes. The enactment of the Act during the fourth quarter of 2017 provides a one-time deemed repatriation tax, or “transition tax” on undistributed foreign earnings which required the Company to reclassify its deferred tax liabilities related to undistributed foreign earnings to income tax payable. The one-time transition tax is based on the Company’s total post-1986 earnings and profits, or “E&P”. The Company recorded a provisional amount for the transition tax resulting in a reduction of $180.1 million of net operating loss carryforwards. However, given the net operating losses and the full valuation allowance on the Company’s net deferred income tax assets in the U.S., the Company will have no cash tax impact in the U.S. The Company has not finalized its calculation of the 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 the Company finalizes the calculation of E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets.
Under the provisions of the Act, all foreign earnings are subject to U.S. taxation. As a result, the Company intends to repatriate substantially all foreign earnings that have been taxed in the U.S. to the extent that the foreign earnings are not restricted by local laws or accounting rules, and there are no substantial incremental costs associated with repatriating the foreign earnings. The Company continues to maintain its indefinite reinvestment policy with respect to immaterial earnings from certain subsidiaries and the associated tax cost is insignificant.
The following table summarizes the activity related to the unrecognized tax benefits:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Balance at beginning of the year |
|
$ |
202,415 |
|
|
$ |
19,709 |
|
|
$ |
16,270 |
|
|
Gross increases related to current year's tax positions |
|
|
5,517 |
|
|
|
5,640 |
|
|
|
3,138 |
|
|
Gross increases (decreases) resulting from the acquisition of QLogic |
|
|
(80,908 |
) |
|
|
179,366 |
|
|
|
- |
|
|
Gross increases (decreased) related to prior year's tax positions |
|
|
1,151 |
|
|
|
(383 |
) |
|
|
398 |
|
|
Releases related to settlements/ statutes expiration |
|
|
(7,883 |
) |
|
|
(1,917 |
) |
|
|
(97 |
) |
|
Balance at the end of the year |
|
$ |
120,292 |
|
|
$ |
202,415 |
|
|
$ |
19,709 |
|
The gross increase resulting from the acquisition of QLogic in 2016 was primarily related to the unrecognized tax benefits against the additional tax assets identified in the measurement period but existed as of the acquisition date. During the third quarter of 2017, the Company filed the final pre-acquisition of QLogic US federal income tax return and made measurement period adjustments to the acquired tax accounts of QLogic. The change had no income statement impact due to the full valuation allowance against the Company’s federal and state net deferred tax assets. Also included in the unrecognized tax benefits at December 31, 2017 is $5.2 million that, if recognized, would reduce the Company’s annual effective tax rate after considering the valuation allowance. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has accrued $1.4 million potential penalties and interest as of December 31, 2017.
Beginning in 2011, the Company is operating under tax incentives in Singapore, which are effective through February 2020. The tax incentives are conditional upon the Company meeting certain employment, revenue, and investment thresholds. The Company realized benefits from the reduced tax rate for the periods presented as follows:
|
|
|
Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(in thousands) |
|
|||||||||
|
Provision for Singapore entity at statutory tax rate of 17% |
|
$ |
1,583 |
|
|
$ |
973 |
|
|
$ |
811 |
|
|
Provision for Singapore entity in the consolidated statement of operations |
|
|
555 |
|
|
|
363 |
|
|
|
310 |
|
|
Benefit from preferential tax rate differential |
|
$ |
1,028 |
|
|
$ |
610 |
|
|
$ |
501 |
|
|
Impact of tax benefits per basic and diluted share |
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
The Company’s major tax jurisdictions are the United States federal government, the states of California and Massachusetts, China, India, Ireland, Israel, Japan, Singapore and the United Kingdom. The Company files income tax returns in the United States federal jurisdiction, the states of California and Massachusetts, various other states, and foreign jurisdictions in which it has a subsidiary or branch operations. The United States federal corporation income tax returns beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service, or IRS. The California corporation income tax returns beginning with the 2000 tax year remain subject to examination by the California Franchise Tax Board. As of December 31, 2017, QLogic’s 2014 tax year is under audit by the IRS. There are routine on-going foreign tax audits in certain jurisdictions such as India, Israel and Taiwan. The Company does not expect any material tax adjustments from any of these audits.