Income Taxes

12 Months Ended

Dec. 31, 2017

9 Income Taxes

Income tax data for the years ended December 31, 2017, 2016 and 2015 is as follows (in thousands):

			Year Ended December 31,
			2017		2016		2015
The components of income from operations before income taxes are
	as follows:
	Domestic		$	55,751	$	35,154	$	66,716
	Foreign			585,346		564,960		475,203
		Total	$	641,097	$	600,114	$	541,919

			Year Ended December 31,
			2017		2016		2015
The current and deferred components of the provision for income
	taxes on operations are as follows:
	Current		$	575,276	$	77,407	$	66,285
	Deferred			45,510		1,204		6,581
		Total	$	620,786	$	78,611	$	72,866

The jurisdictional components of the provision for income taxes on
	operations are as follows:
	Federal		$	535,777	$	19,693	$	20,882
	State			26,561		3,090		3,389
	Foreign			58,448		55,828		48,595
		Total	$	620,786	$	78,611	$	72,866

The U.S. enacted the Tax Cuts and Jobs Act (the “2017 Tax Act”) on December 22, 2017 (“Enactment Date”).

The 2017 Tax Act contains several key provisions including, but not limited to the following:

A one-time tax on the mandatory deemed repatriation of pre-2018 foreign earnings and profits (“E&P”), referred to as the toll charge;

Reduction in the Corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017;

Introduction of a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (“GILTI”) at an effective tax rate of 10.5% for tax years beginning after December 31, 2017 (increasing to 13.125% for tax years beginning after December 31, 2025) with a partial offset by foreign tax credits; and

Introduction of a territorial tax system beginning in 2018 by providing a 100% dividends received deduction on certain qualified dividends from foreign subsidiaries.

During the fourth quarter of 2017, we recorded an incremental income tax provision of $550 million, which is comprised of the following:

An estimated income tax provision of $490 million for the one-time deemed repatriation of pre-2018 E&P. In accordance with the 2017 Tax Act, the toll charge liability may be paid over eight years. As such, we have recorded $450 million and $40 million in long-term income tax liabilities and accrued income taxes (current), respectively, as of December 31, 2017;

An estimated net income tax provision of $20 million, for the remeasurement of our deferred tax assets and liabilities at the newly enacted tax rate of 21%; and

As a result of the 2017 Tax Act and the Company’s expectations about distributing certain cash balances from its foreign subsidiaries to the U.S., the Company also recorded estimated income tax provisions for estimated state income taxes and foreign withholding taxes of $40 million.

The $550 million income tax provision recorded was based on currently available information and interpretations of applying the provisions of the 2017 Tax Act as of the time of filing this Annual Report on Form 10-K. In accordance with authoritative guidance issued by the Securities and Exchange Commission (“SEC”), the income tax effect of the 2017 Tax Act represent provisional amounts for which our accounting is incomplete but for which reasonable estimates were determined and recorded during the fourth quarter of 2017. The guidance provides for a measurement period, up to one year from the Enactment Date, in which provisional amounts may be adjusted when additional information is obtained, prepared and analyzed. Adjustments to provisional amounts identified during the measurement period should be recorded as an income tax provision or benefit in the period the adjustment is determined.

We continue to evaluate the impacts of the 2017 Tax Act and consider the amounts recorded to be provisional. In addition, we are still evaluating the GILTI provisions of the 2017 Tax Act and its impact, if any, on our consolidated financial statements as of December 31, 2017. Companies are allowed to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. We have not yet determined our accounting policy because determining the impact of the GILTI provisions requires additional analysis. As such, we did not record a deferred income tax expense or benefit related to the GILTI provisions in our consolidated statement of operations for the year ended December 31, 2017 and we will finalize this analysis and determination during the measurement period.

The Company recorded a provisional amount for its toll charge, which represents its reasonable estimate of the liability due for the mandatory deemed repatriation of its foreign E&P. Determining the provisional toll charge liability required a significant effort based on a number of estimates and factors that need to be further analyzed and finalized including, but not limited to, the following:

Analyzing our accumulated foreign E&P and related foreign tax pools, including historical practices and assertions made in determining such; and

Determining the composition, including intercompany receivables and payables of specified foreign corporations, of our foreign E&P that is held in cash or liquid assets and other assets at several measurement dates, as a different tax rate is applied to each when determining the toll charge liability.

For the aforementioned factors as well as the proximity of the enactment of the 2017 Tax Act to our year-end, we had limited time to analyze the 2017 Tax Act and its various interpretations including any additional guidance issued through the time of filing this Annual Report on Form 10-K, to assess how to apply the new law to our specific facts and circumstances and determine the toll charge that we expect to include in our 2017 tax return. We made certain assumptions and estimates in determining the provisional toll charge that may result in adjustments when we finalize our analysis and accounting for the 2017 Tax Act.

Certain income tax effects of the 2017 Tax Act represent provisional amounts for which our analysis is incomplete but for which reasonable estimates were determined and recorded during the fourth quarter of 2017. Our actual results may materially differ from our current estimates due to, among other things, further guidance that may be issued by U.S. federal or state tax authorities to interpret the 2017 Tax Act, or guidance from the SEC or FASB regarding income tax accounting matters related to the 2017 Tax Act. We will continue to analyze the 2017 Tax Act and any additional guidance that may be issued so we can finalize the tax effects of the 2017 Tax Act on our financial statements in the measurement period.

At December 31, 2017, as a result of the 2017 Tax Act deemed repatriation and plans to distribute certain cash balances from its foreign subsidiaries to the U.S., we have recorded state and foreign withholding taxes on the unremitted earnings of our foreign subsidiaries. The Company continues to be indefinitely reinvested in relation to the cumulative historical outside basis difference not related to the unremitted earnings that were taxed. We will continue to evaluate our assertions, including intentions and plans, on the cumulative historical outside basis differences, not related to the unremitted earnings that were taxed, in our foreign subsidiaries as of December 31, 2017. We expect to finalize our analysis and accounting related to the toll charge, deferred tax assets and liabilities and any remaining outside basis differences in our foreign subsidiaries during the measurement period. The determination of the unrecognized deferred tax liability on cumulative historical outside basis differences that are not related to the unremitted earnings that were taxed is not practicable.

			Year Ended December 31,
			2017		2016		2015
The differences between income taxes computed at the United States
	statutory rate and the provision for income taxes are summarized
	as follows:
	Federal tax computed at U.S. statutory income tax rate		$	224,384	$	210,040	$	189,672
	2017 Tax Act			550,000		-		-
	Settlement of tax audits			706		345		(3,258)
	State income tax, net of federal income tax benefit			1,289		2,008		2,601
	Net effect of foreign operations			(134,117)		(133,518)		(112,426)
	Effect of stock-based compensation			(19,566)		-		-
	Other, net			(1,910)		(264)		(3,723)
		Provision for income taxes	$	620,786	$	78,611	$	72,866

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the marginal effective tax rates were approximately 37.5%, 12.5%, 19.25% and 0%, respectively, as of December 31, 2017. The Company has a contractual tax rate of 0% on qualifying activities in Singapore through March 2021, based upon the achievement of certain contractual milestones, which the Company expects to continue to meet. The current statutory tax rate in Singapore is 17%. The effect of applying the contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income in 2017, 2016 and 2015 by $25 million, $23 million and $20 million, respectively and increased the Company’s net income per diluted share by $0.31, $0.29 and $0.25, respectively.

The Company’s effective tax rates for the years ended December 31, 2017, 2016 and 2015 were 96.8%, 13.1% and 13.4%, respectively. The provision for income taxes for 2017 includes a $550 million estimate for the impact of the 2017 Tax Act. In addition, the effective tax rate in 2017 includes the adoption of new accounting guidance related to stock-based compensation, which decreased income tax expense by $20 million and decreased the Company’s effective tax rate by 3.1 percentage points. See Note 2 for further information regarding the adoption of this standard.

The income tax provision for 2016 included a $3 million tax benefit related to a release of a valuation allowance on certain net operating loss carryforwards. In 2015, the income tax provision included a $3 million tax benefit related to the completion of tax audit examinations. The remaining differences between effective tax rates can primarily be attributed to differences in the proportionate amounts of pre-tax income recognized in jurisdictions with different effective tax rates.

The tax effects of temporary differences and carryforwards which give rise to deferred tax assets and deferred tax liabilities are summarized as follows (in thousands):

				December 31,
				2017		2016
Deferred tax assets:
	Net operating losses and credits			$	75,630	$	76,027
	Depreciation				5,952		8,310
	Stock-based compensation				9,815		19,609
	Deferred compensation				21,434		24,813
	Revaluation of equity investments and licenses				3,465		4,707
	Inventory				4,864		5,235
	Accrued liabilities and reserves				8,230		8,814
	Other				11,873		15,948
		Total deferred tax assets			141,263		163,463
	Valuation allowance				(62,098)		(61,225)
		Deferred tax assets, net of valuation allowance			79,165		102,238
Deferred tax liabilities:
	Capitalized software				(19,630)		(15,323)
	Amortization				(3,394)		(5,115)
	Indefinite-lived intangibles				(13,254)		(19,680)
	Deferred tax liability on foreign earnings				(21,000)		-
		Total deferred tax liabilities			(57,278)		(40,118)
			Net deferred tax assets	$	21,887	$	62,120

As of December 31, 2017, the Company has provided a deferred tax valuation allowance of $62 million, of which $59 million relates to certain foreign net operating losses. The Company’s net deferred tax assets associated with net operating losses and tax credit carryforwards are approximately $17 million as of December 31, 2017, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.

As a result of the adoption of new accounting guidance related to stock-based compensation, the Company no longer records excess tax benefits related to stock-based compensation in equity. The income tax benefits associated with equity compensation expense recognized for tax purposes and credited to additional paid-in capital were $14 million and $13 million for the years ended December 31, 2016 and 2015, respectively.

The Company accounts for its uncertain tax return reporting positions in accordance with the accounting standards for income taxes, which require financial statement reporting of the expected future tax consequences of uncertain tax reporting positions on the presumption that all concerned tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances, but prohibit any discounting of unrecognized tax benefits associated with those reporting positions for the time value of money. The Company continues to classify interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes.

The following is a summary of the activity of the Company’s unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 (in thousands):

		2017		2016		2015
Balance at the beginning of the period		$	9,964	$	14,450	$	19,596
	Changes resulting from completion of tax examinations		-		(828)		(2,405)
	Other changes in uncertain tax benefits		(4,121)		(3,658)		(2,741)
Balance at the end of the period		$	5,843	$	9,964	$	14,450

With limited exceptions, the Company is no longer subject to tax audit examinations in significant jurisdictions for the years ended on or before December 31, 2012. However, carryforward tax attributes that were generated in years beginning on or before January 1, 2013 may still be adjusted upon examination by tax authorities if the attributes are utilized. The Company continuously monitors the lapsing of statutes of limitations on potential tax assessments for related changes in the measurement of unrecognized tax benefits, related net interest and penalties, and deferred tax assets and liabilities.

During the year ended December 31, 2016, the Company concluded tax audit disputes outside the U.S. that, in part, related to matters for which the Company had recorded net uncertain tax benefits. The resolution of these tax disputes resulted in a $1 million reduction in the measurement of its unrecognized tax benefits for the year ended December 31, 2016.

During the year ended December 31, 2015, the Company concluded U.S. tax audit disputes that, in part, related to matters for which the Company had recorded net uncertain tax benefits. The resolution of these tax disputes resulted in a $2 million reduction in the measurement of its unrecognized tax benefits and a $2 million decrease in its provision for income taxes for the year ended December 31, 2015.

As of December 31, 2017, the Company expects to record additional reductions in the measurement of its unrecognized tax benefits and related net interest and penalties of approximately $1 million within the next twelve months due to potential tax audit settlements and the lapsing of statutes of limitations on potential tax assessments. The Company does not expect to record any other material reductions in the measurement of its unrecognized tax benefits within the next twelve months.