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Income Taxes | 12 Months Ended
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Jan. 27, 2019
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company's regional income before income taxes is as follows:
| Fiscal Year Ended
(in thousands) | January 27, 2019 |  | January 28, 2018 |  | January 29, 2017
Domestic | $ | (20,211 | ) |  | $ | (14,421 | ) |  | $ | (19,602 | )
Foreign | 83,309 |  |  | 74,292 |  |  | 92,662 |
Total | $ | 63,098 |  |  | $ | 59,871 |  |  | $ | 73,060 |
The (benefit) provision for income taxes consists of the following:
| Fiscal Year Ended
(in thousands) | January 27, 2019 |  | January 28, 2018 |  | January 29, 2017
Current income tax provision |  |  |  |  |
Federal | $ | (147 | ) |  | $ | 2,108 |  |  | $ | — |
State | — |  |  | — |  |  | — |
Foreign | 21,753 |  |  | 13,442 |  |  | 16,034 |
Subtotal | 21,606 |  |  | 15,550 |  |  | 16,034 |
Deferred income tax (benefit) provision |  |  |  |  |
Federal | (25,367 | ) |  | 7,701 |  |  | 107 |
State | — |  |  | — |  |  | — |
Foreign | 3,677 |  |  | (60 | ) |  | 2,258 |
Subtotal | (21,690 | ) |  | 7,641 |  |  | 2,365 |
(Benefit) provision for income taxes | $ | (84 | ) |  | $ | 23,191 |  |  | $ | 18,399 |
The (benefit) provision for income taxes reconciles to the amount computed by applying the statutory federal rate to income before taxes as follows:
| Fiscal Year Ended
(in thousands) | January 27, 2019 |  | January 28, 2018 |  | January 29, 2017
Federal income tax at statutory rate | $ | 13,223 |  |  | $ | 20,222 |  |  | $ | 25,571 |
State income taxes, net of federal benefit | (55 | ) |  | (159 | ) |  | — |
Foreign taxes differential | 2,910 |  |  | (8,698 | ) |  | (12,074 | )
Tax credits generated | (3,344 | ) |  | (3,278 | ) |  | (2,864 | )
Changes in valuation allowance | (23,029 | ) |  | (41,911 | ) |  | 5,578 |
Non-taxable gain on sale | — |  |  | — |  |  | (2,978 | )
Changes in uncertain tax positions | 2,219 |  |  | 1,538 |  |  | 1,047 |
Equity compensation | 1,849 |  |  | (8,333 | ) |  | 2,553 |
Permanent differences | — |  |  | 264 |  |  | 448 |
GILTI and Subpart F income | 1,164 |  |  | 299 |  |  | 266 |
Impact of US tax reform | 1,904 |  | (1) | 65,442 |  | (2) | — |
Other | 3,075 |  |  | (2,195 | ) |  | 852 |
(Benefit) provision for income taxes | $ | (84 | ) |  | $ | 23,191 |  |  | $ | 18,399 |
(1) Impact of US tax reform for fiscal year 2019 includes a tax benefit from overall reduction to transition tax of approximately $5.0 million, and a tax expense from reduction to foreign tax credits of approximately $6.9 million. During fiscal year 2019, the Company continues to maintain a valuation allowance against foreign tax credits. The transition tax, net of deferreds, resulted in no current income tax payable. (2) Impact of US tax reform for fiscal year 2018 includes $66.5 million of expense due to the estimated impact of the transition tax, net of foreign tax credits generated. In prior fiscal years, the Company received an income tax benefit from tax rate differentials due to its presence in foreign jurisdictions such as Switzerland and Canada where statutory rates were lower than U.S. federal tax rates. This income tax benefit is reflected in the line item "Foreign taxes differential." This line also includes the benefit of the Swiss Ruling discussed below. However, for the current year, due to the US rate being lower than the tax rate in the Company’s larger foreign jurisdictions, such as Canada, there is an overall provision expense for foreign jurisdictions in fiscal year 2019. On December 6, 2016, the Company was granted a tax holiday ("Tax Holiday") with an effective date of January 30, 2017. This Tax Holiday replaced the previous Swiss Ruling. The Tax Holiday provides Semtech (International) AG with a 70% reduction to the Cantonal tax rate, bringing the statutory Cantonal tax rate down from 12.56% to 3.77%. The maximum benefit under this Tax Holiday is CHF 500.0 million of cumulative after tax profit which equates to a maximum potential tax savings of CHF 44.0 million. The Tax Holiday is effective for five years and can be extended for an additional five years if the Company meets certain staffing targets by January 30, 2022. The Tax Cuts and Jobs Act of 2017 On December 22, 2017, the U.S. enacted the Tax Act that instituted fundamental changes to the taxation of multinational corporations. The Tax Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings of foreign affiliates. Although the Tax Act is generally effective January 1, 2018, GAAP required recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. As a result of the impact of the Tax Act, the SEC provided guidance (Staff Accounting Bulletin 118 (“SAB 118”)) that allows public companies to record provisional amounts for those impacts, with the requirement that the accounting be completed in a period not to exceed one year from the date of enactment. As of January 28, 2018, the Company had not completed the accounting for the tax effects of the Tax Act. Therefore, the Company recorded provisional amounts for the effects of the Tax Act, including but not limited to, the following primary impacts of the Tax Act: re-measurement of deferred tax assets and liabilities and the estimated calculation of the one-time mandatory transition tax on undistributed earnings of foreign affiliates. The final accounting for the Tax Act was completed during fiscal year 2019. Corporate Tax Rate Change: For the year ended January 28, 2018, the Company recorded an income tax benefit of approximately $2.6 million due to the decrease in the corporate tax rate from 35% to 21% and resulting re-measurement of the Company’s indefinite-lived deferred tax liability. As of January 27, 2019, the Company finalized the analysis and did not make any adjustment to the provisional amount recorded for the year ended January 28, 2018. Global Intangible Low Taxed Income: In addition to the changes described above, the Tax Act imposed a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. The GILTI provisions effectively tax the foreign earnings of U.S. multinational companies at 10.5%, half the current corporate tax rate. During fiscal year 2019, as a result of the Company obtaining the information necessary to evaluate the impact of the GILTI provisions, the Company finalized its analysis regarding the interplay of foreign tax credits associated with this income, which are allowed against the U.S. tax liability generated as a result of the GILTI provision, and the potential impact on the related valuation allowance. As a result, the Company recorded a tax benefit of $15.8 million during the first quarter of fiscal year 2019 related to the reduction of the valuation allowance on certain U.S. deferred tax assets generated prior to fiscal year 2019. In accordance with guidance issued by the FASB, the Company has made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. For fiscal year 2019, the Company recorded approximately $0.9 million of provision expense related to GILTI inclusions. Mandatory Transition Tax: For the year ended January 28, 2018, the Company recorded a provisional income tax expense of $2.1 million (net of valuation allowance) due to the imposition of the mandatory transition tax on the deemed repatriation of undistributed foreign earnings. In connection with this expense, the Company has estimated that it will utilize approximately $78.4 million of tax attributes, resulting in a current tax liability of $1.1 million. As of January 27, 2019, the Company completed it’s accounting for the tax effects of the Tax Act and was able to use approximately $76.5 million of tax attributes to completely offset any cash tax liability resulting from the transition tax. During the fourth quarter of fiscal year 2019, the Company completed the final accounting related to the remeasurement of its existing deferred tax assets under SAB 118 and recorded a net $1.9 million increase to the tax provision expense. Undistributed Foreign Earnings: Prior to the enactment of the Tax Act, with few exceptions, U.S. federal income and foreign withholding taxes had not been provided on the excess of the amount for financial reporting over the tax basis of investments in the Company’s foreign subsidiaries that were essentially permanent in duration. With the enactment of the Tax Act, all post-1986 previously unremitted earnings for which no U.S. deferred tax liability had been accrued have now been subject to U.S. tax. Notwithstanding the U.S. taxation of these amounts, the Company has determined that $516.0 million of foreign earnings will continue to be reinvested indefinitely outside of the U.S. As a result, the Company has not provided any tax on these amounts because the Company believes that it currently has the ability to keep those earnings indefinitely invested and the Company has specific plans for reinvestment of these undistributed foreign earnings. In connection with the enactment of the Tax Act, the Company has determined it will remit approximately $240.0 million of foreign earnings in the foreseeable future, and as a result, has established a deferred income tax liability for the withholding tax that will be due upon distribution of these earnings. During fiscal year 2019, approximately $80.0 million of foreign earnings were remitted, and the deferred income tax liability for the withholding tax was adjusted accordingly. While management believes the amounts recorded during fiscal year 2019 represent reasonable estimates of the ultimate impact U.S. tax reform will have on the Company’s consolidated financial statements, it is possible the Company may materially adjust these amounts in consideration of future administrative guidance, notices, implementation regulations, potential legislative amendments and interpretations. These adjustments could have a material impact on the Company’s Balance Sheets and Statements of Income. The components of the net deferred income tax assets and liabilities at January 27, 2019 and January 28, 2018 are as follows:
(in thousands) | January 27, 2019 |  | January 28, 2018
Non-current deferred tax asset: |  |  |
Inventory reserve | 4,984 |  |  | 2,406 |
Bad debt reserve | 17 |  |  | 659 |
Accrued service fees | — |  |  | 306 |
Foreign tax credits | 2,996 |  |  | 9,987 |
Research credit carryforward | 6,693 |  |  | 11,707 |
NOL carryforward | 8,773 |  |  | 8,326 |
Payroll and related accruals | 8,133 |  |  | 7,344 |
Share-based compensation | 14,150 |  |  | 9,282 |
Foreign pension deferred | 832 |  |  | 477 |
Accrued sales reserves | 763 |  |  | — |
Other deferred assets | 1,031 |  |  | 1,847 |
Valuation allowance | (18,912 | ) |  | (41,050 | )
Total non-current deferred tax asset | 29,460 |  |  | 11,291 |
Non-current deferred tax liabilities: |  |  |
Goodwill and other intangibles | (3,227 | ) |  | (5,844 | )
Property, plant and equipment | (6,482 | ) |  | (4,955 | )
Repatriation of foreign earnings | (8,158 | ) |  | (10,427 | )
Other non-current deferred tax liabilities | (592 | ) |  | (511 | )
Total non-current deferred tax liabilities | (18,459 | ) |  | (21,737 | )
Net deferred tax assets (liabilities) | $ | 11,001 |  |  | $ | (10,446 | )
As of January 27, 2019, the Company had federal and state net operating loss carryforwards of $3.3 million and $107.7 million, respectively, which, subject to certain limitations, are available to offset future taxable income through fiscal year 2039. The Company believes the change in control limitations will impact its ability to utilize the federal net operating losses and therefore has set up a full valuation allowance. In the first quarter of fiscal year 2018, the Company adopted FASB ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). Under the amended guidance, all excess tax benefits and tax deficiencies will be recognized in the Statements of Income as they occur. This replaced the previous guidance, which required tax benefits that exceed compensation cost ("windfalls") to be recognized in additional paid in capital. It also eliminates the need to maintain a windfall pool, and removes the requirement to delay recognizing a windfall until it reduces current taxes payable. For fiscal year 2019, the Company recognized a windfall tax benefit of $1.3 million. As of January 27, 2019, the Company had gross federal and state research credits available of approximately $7.8 million and $14.9 million, respectively, which are available to offset taxable income. These credits will expire between fiscal years 2031 through 2039. The Company also had gross Canadian research credits available of approximately $3.3 million. These credits will expire between fiscal years 2029 through 2039. As of January 27, 2019 and January 28, 2018, the Company had approximately $29.9 million and $30.6 million of net deferred tax assets, respectively, the majority of which are in the U.S. and Canada. The Company has recorded valuation allowances of $18.9 million and $41.1 million against its deferred tax assets at January 27, 2019 and January 28, 2018, respectively, based on the Company's assessment of its ability to utilize its deferred tax assets. The valuation allowances established relate to certain U.S. deferred tax assets, for which the Company has determined that it is more likely than not that a benefit will not be realized. In considering whether a valuation allowance was required for the Company's U.S. deferred income tax assets, the Company considered all available positive and negative evidence. Positive evidence considered included reversing taxable temporary differences. Negative evidence considered included the cumulative pre-tax losses in the U.S. recorded during the three-year period ended January 27, 2019, on both an annual and cumulative basis. Based on the weight of all available evidence, the Company concluded that the negative evidence outweighed the positive evidence and that it was more likely than not that the U.S. state deferred tax assets that cannot be realized through the reversal of taxable temporary differences would not be realized. As a result, the Company established a partial valuation allowance against the deferred tax assets in the U.S. that will not be realized through the reversal of taxable temporary differences and released the associated valuation allowance in the first quarter of fiscal year 2019 with an associated tax benefit of $15.8 million. Changes in the valuation allowance for the three years ended January 27, 2019 are summarized in the table below:
| Fiscal Year Ended
(in thousands) | January 27, 2019 |  | January 28, 2018 |  | January 29, 2017
Beginning balance | $ | 41,050 |  |  | $ | 82,961 |  |  | $ | 77,383 |
Additions | 152 |  |  | 74 |  |  | 5,578 |
Releases | (22,290 | ) |  | (41,985 | ) |  | — |
Ending balance | $ | 18,912 |  |  | $ | 41,050 |  |  | $ | 82,961 |
Uncertain Tax Positions The Company uses a two-step approach to recognize and measure uncertain tax positions ("UTP"). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (before federal impact of state items) is as follows:
| Fiscal Year Ended
(in thousands) | January 27, 2019 |  | January 28, 2018
Beginning balance | $ | 16,059 |  |  | $ | 11,452 |
Additions based on tax positions related to the current year | 2,642 |  |  | 5,789 |
Reductions for tax positions of prior years, net | — |  |  | (1,182 | )
Reductions for settlements with tax authorities | (408 | ) |  | — |
Ending balance | $ | 18,293 |  |  | $ | 16,059 |
Included in the balance of gross unrecognized tax benefits at January 27, 2019 and January 28, 2018, are $4.5 million and $3.9 million, respectively, of net tax benefits (after federal impact of state items) that, if recognized, would impact the effective tax rate. The liability for UTP is reflected on the Balance Sheets as follows:
| Fiscal Year Ended
(in thousands) | January 27, 2019 |  | January 28, 2018
Deferred tax assets - non-current | $ | 12,492 |  |  | $ | 12,135 |
Other long-term liabilities | 4,479 |  |  | 3,924 |
Total accrued taxes | $ | 16,971 |  |  | $ | 16,059 |
The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes on the Statements of Income. Since the Company has sufficient research and development ("R&D") credit carryforwards, there would be no cash tax liability, and therefore no additional penalties or interest accrued during fiscal year 2019. The Company had approximately $0.0 million of net interest and penalties accrued at January 27, 2019 and January 28, 2018. Tax years prior to 2013 (the Company’s fiscal year 2014) are generally not subject to examination by the Internal Revenue Service ("IRS") except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. For state returns, the Company is generally not subject to income tax examinations for years prior to 2012 (the Company’s fiscal year 2013). The Company has a significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2018. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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