Income Taxes

12 Months Ended

Dec. 31, 2019

10 Income Taxes

Income tax data for the years ended December 31, 2019, 2018 and 2017 is as follows (in thousands):


	Year Ended December 31,
	2019		2018		2017
The components of income from operations before income taxes are as follows:
Domestic	$	97,325	$	57,822	$	55,751
Foreign		580,914		624,324		585,346

Total	$	678,239	$	682,146	$	641,097


	Year Ended December 31,
	2019		2018			2017
The components of the income tax provision from operations were as follows:
Federal	$	7,009	$	27,277		$	499,828
State		3,329		(11,964	)		21,163
Foreign		66,083		70,634			54,285

Total current tax provision	$	76,421	$	85,947		$	575,276

Federal	$	6,913	$	(3,256	)	$	35,949
Stat e		1,253		2,247			5,398
Foreign		1,454		3,414			4,163
Total deferred tax provision		9,620		2,405			45,510

Total provision	$	86,041	$	88,352		$	620,786

The differences between income taxes computed at the United States statutory rate and the provision for income taxes are summarized as follows for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	Year Ended December 31,
	2019			2018			2017
Federal tax computed at U.S. statutory income tax rate	$	142,430		$	143,251		$	224,384
Enactment of the 2017 Tax Cuts and Jobs Act		—			(6,059	)		550,000
Foreign currency exchange impact on distributed earnings		(3,229	)		7,495			—
GILTI, net of foreign tax credits		10,523			13,727			—
Settlement of tax audits		—			—			706
State income tax, net of federal income tax benefit		3,459			2,910			1,289
Net effect of foreign operations		(52,727	)		(57,003	)		(131,694	)
Effect of stock-based compensation		(9,211	)		(9,089	)		(19,566	)
Other, net		(5,204	)		(6,880	)		(4,333	)

Provision for income taxes	$	86,041		$	88,352		$	620,786

The Company’s effective tax rates were 12.7%, 13.0% and 96.8% for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company’s effective income tax rate differs from the U.S. federal statutory rate each year due to differences in the proportionate amounts of

pre-tax

income recognized in jurisdictions with different effective tax rates and the items discussed below.

The four principal jurisdictions in which the Company manufactures are the U.S., Ireland, the U.K. and Singapore, where the statutory tax rates were 21%, 12.5%, 19% and 17%, respectively, as of December 31, 2019. The Company has a received a tax holiday 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 effect of applying the 0% contractual tax rate rather than the statutory tax rate to income from qualifying activities in Singapore increased the Company’s net income during the years ended December 31, 2019, 2018 and 2017 by $24 million, $28 million and $25 million, respectively, and increased the Company’s net income per diluted share by $0.35, $0.36 and $0.31, respectively.

During 2019, the Company’s effective tax rate differed from the 21% U.S. statutory tax rate primarily due to the jurisdictional mix of earnings, a $11 million provision related to the GILTI tax and a tax benefit of $9 million on stock-based compensation.

The 2018 effective tax rate differed from the U.S. federal statutory tax rate primarily due to the jurisdictional mix of earnings, a $14 million provision related to the GILTI tax, an $8 million provision for a change in foreign currency exchange rates related to the transition tax, a $9 million benefit related to stock-based compensation and a $6 million

net benefit related to the finalization of the impact of the Tax Cuts and Jobs Act (the “2017 Act”).

The 2017 effective tax rate of 96.8% differs from the 35% U.S. statutory tax rate primarily due to the 2017 Act and the jurisdictional mix of earnings. As a result of the 2017 Act, for the year ended December 31, 2017, the Company accrued a $550 million tax provision. This provision reduced net income per diluted share by $6.82 in 2017, and the Company’s effective tax rate was 11.0% excluding this $550 million provision. During 2017, the Company also had a benefit of $20 million related to stock-based compensation.

Prior to the enactment of the 2017 Act, the Company had an indefinite reinvestment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. At the end of 2018, and as a result of the enactment of the 2017 Act, the Company reevaluated its historic assertion and no longer considered these earnings to be indefinitely reinvested in its foreign subsidiaries. The Company recorded a tax provision of $3 million and $4 million for 2019 and 2018, respectively, for future withholding taxes and U.S. state taxes on repatriation of 2019 and 2018 undistributed earnings.

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,
	2019			2018
Deferred tax assets:
Net operating losses and credits	$	55,939		$	63,052
Depreciation		4,776			7,495
Operating leases		19,849			—
Amortization		3,738			3,633
Stock-based compensation		9,790			9,984
Deferred compensation		20,077			22,058
Unrealized foreign currency gain/loss		7,955			5,881
Deferred revenue		9,696			4,654
Revaluation of equity investments and licenses		3,424			3,148
Inventory		4,824			4,588
Accrued liabilities and reserves		7,215			7,213
Other		3,839			4,073

Total deferred tax assets		151,122			135,779
Valuation allowance		(51,221	)		(53,893	)

Deferred tax assets, net of valuation allowance		99,901			81,886
Deferred tax liabilities:
Capitalized software		(21,025	)		(19,491	)
Operating leases		(19,553	)		—
Indefinite-lived intangibles		(14,363	)		(13,753	)
Deferred tax liability on foreign earning s		(18,027	)		(20,443	)

Total deferred tax liabilities		(72,968	)		(53,687	)

Net deferred tax assets	$	26,933		$	28,199

The Company has gross foreign net operating losses of $221 million that do not expire under current laws. As of December 31, 2019, the Company has provided a deferred tax valuation allowance of $51 million, of which $48 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 $8 million as of December 31, 2019, which represent the future tax benefit of foreign net operating loss carryforwards that do not expire under current law.

The Company adopted new accounting guidance which eliminates the deferral of tax effects on intra-entity transfers other than inventory and requires an entity to recognize the income tax consequences when the transfer occurs. The Company adopted this standard as of January 1, 2018 with a $4 million charge to beginning retained earnings in the consolidated balance sheet.

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 gross unrecognized tax benefits, excluding interest and penalties, for the year ended December 31, 2019, 2018 and 2017 (in thousands):


	2019			2018			2017
Balance at the beginning of the period	$	26,108		$	5,843		$	9,964
Net reductions for settlement of tax audits		—			—			(22	)
Net reductions for lapse of statutes taken during the period		(261	)		(436	)		(5,178	)
Net additions for tax positions taken during the prior period		—			17,651			—
Net additions for tax positions taken during the current period		1,943			3,050			1,079

Balance at the end of the period	$	27,790		$	26,108		$	5,843

As of 2019, the total amount of gross unrecognized tax benefits was $28 million, all of which, if recognized, would impact the Company’s effective tax rate.

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, 2014. 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.

As of December 31, 2019, 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.

As of December 31, 2019, the Company is currently under an income tax audit in the U.S. for its 2016 tax year. The Company is also subject to various foreign audits and inquiries and we currently do not expect any material adjustments.

The following is a summary of the activity of the Company’s valuation allowance for the years ended December 31, 2019, 2018 and 2017 (in thousands):


	Balance at Beginning of Period		Charged to Provision for Income Taxes*			Other**			Balance at End of Period
Valuation allowance for deferred tax assets:
Valuation allowance for deferred tax assets:
2019	$	53,893	$	(1,242	)	$	(1,430	)	$	51,221
2018	$	62,098	$	(2,128	)	$	(6,077	)	$	53,893
201 7	$	61,225	$	(6,363	)	$	7,236		$	62,098

*	These amounts have been recorded as part of the income statement provision for income taxes. The income statement effects of these amounts have largely been offset by amounts related to changes in other deferred tax balance sheet accounts.

The change in the valuation allowance during the year ended December 31, 2019 is primarily due to the effect of foreign currency translation on a valuation allowance related to a net operating loss carryforward. The change in the valuation allowance during the year ended December 31, 2018 was primarily due to the write-off of a valuation allowance to Retained Earnings for the tax effect related to intra-entity transfers. The change in the valuation allowance during the year ended December 31, 2017 was primarily due to the effect of foreign currency translation on a valuation allowance related to a net operating loss carryforward.