Taxes

A reconciliation of the United States federal statutory corporate tax rate to the Company’s income tax expense, or effective tax rate, was as follows:



	Three-months Ended				Nine-months Ended
	September 30, 2018		October 1, 2017		September 30, 2018		October 1, 2017
Income tax provision at federal statutory corporate tax rate	21	%	35	%	21	%	35	%
State income taxes, net of federal benefit	1	%	1	%	1	%	1	%
Foreign tax rate differential	(7	)%	(18	)%	(7	)%	(18	)%
Tax credit	—	%	(1	)%	—	%	(1	)%
Discrete tax benefit related to Tax Act 2017	(9	)%	—	%	(4	)%	—	%
Discrete tax benefit related to stock option exercises	(4	)%	(7	)%	(5	)%	(13	)%
Other discrete tax events	(2	)%	(2	)%	(1	)%	(1	)%
Other	1	%	1	%	1	%	1	%
Income tax provision	1	%	9	%	6	%	4	%

On December 22, 2017, the United States Congress passed and the President signed into law the Tax Cuts and Jobs Act of 2017 (Tax Act). The Tax Act included a decrease in the U.S. federal statutory corporate tax rate from 35% to 21%, a one-time transition tax on unrepatriated foreign earnings, and limits on certain deductions. The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 118 to provide guidance to companies on how to implement the accounting and disclosure changes as a result of the Tax Act. The Company made what it considered to be a reasonable estimate of the impact of the Tax Act in its financial statements for the year ended December 31, 2017. In the third quarter of 2018, the Company revised its estimate of the impact of the Tax Act based on additional regulatory guidance. The effective tax rate, as a result, was reduced by 9 percentage points and 4 percentage points for the three-month and nine-month period ended September 30, 2018, respectively.

This significant estimate is highly judgmental and changes to this estimate could result in material charges or credits in future reporting periods. The Company will continue to review the guidance at the Federal and State levels through the end of 2018 and additional revisions to the estimates of the impact of the Tax Act may be required in the fourth quarter of 2018 as regulatory guidance continues to develop, specifically at the individual State level. The Tax Act subjects the Company to current tax on Global Intangible Low-Taxed Income (GILTI) earned by certain foreign subsidiaries. The Company has made an accounting policy election to provide for the tax expense related to GILTI in the year the tax is incurred rather than recognize deferred taxes for these temporary differences.

The majority of income earned outside of the United States is permanently reinvested to provide funds for international expansion. The Company is tax resident in numerous jurisdictions around the world and has identified its major jurisdictions as the United States, Ireland, and China. The statutory tax rate is 12.5% in Ireland and 25% in China, compared to the U.S. federal statutory corporate tax rate of 21%. International rights to certain of the Company's intellectual property are held by a subsidiary whose legal jurisdiction does not tax this income, resulting in a foreign effective tax rate that is lower than the above mentioned statutory rates, although the reduced taxes overseas have been partially offset by changes in U.S. tax law. These differences resulted in a decrease in the effective tax rate by 7 percentage points for the three-month and nine-month periods ended September 30, 2018, and a decrease in the effective tax rate by 18 percentage points for the three-month and nine-month periods ended October 1, 2017.

The excess tax benefit arising from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes from stock option exercises resulted in a decrease of the effective tax rate by 4 and 7 percentage points for the three-month periods ended September 30, 2018 and October 1, 2017, respectively, and a decrease of the effective tax rate by 5 and 13 percentage points for the nine-month periods ended September 30, 2018 and October 1, 2017, respectively. Certain reserves for income taxes and other provision-to-return adjustments resulted in a decrease of the effective tax rate by 2 percentage points for both the three-month periods ended September 30, 2018 and October 1, 2017 and a decrease of the effective tax rate by 1 percentage point for both the nine-month periods ended September 30, 2018 and October 1, 2017.

On January 1, 2018, the Company adopted Accounting Standard Update (ASU) 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other than Inventory." This Update requires the recognition of deferred income taxes for an intra-entity transfer of an asset other than inventory. As a result of this ASU, the Company recorded $5,961,000 through a cumulative-effect adjustment directly to retained earnings at the beginning of fiscal year 2018.

During the nine-month period ended September 30, 2018, the Company recorded a $204,000 increase in reserves for income taxes, net of deferred tax benefit. Estimated interest and penalties included in these amounts totaled $33,000 for the nine-month period ended September 30, 2018.

The Company’s reserve for income taxes, including gross interest and penalties, was $7,674,000 as of September 30, 2018, which included $6,646,000 classified as a non-current liability and $1,028,000 recorded as a reduction to non-current deferred tax assets. The amount of gross interest and penalties included in these balances was $773,000. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $1,200,000 to $1,300,000 over the next twelve months.

The Company has defined its major tax jurisdictions as the United States, Ireland, and China, and within the United States, Massachusetts. Within the United States, the tax years 2015 through 2017 remain open to examination by the Internal Revenue Service and various state tax authorities. The tax years 2014 through 2017 remain open to examination by various taxing authorities in other jurisdictions in which the Company operates.