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Income Taxes | 12 Months Ended
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Jan. 26, 2020
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The Company's regional income before income taxes and equity in net gains (losses) of equity method investments was as follows:
| Fiscal Year Ended
(in thousands) | January 26, 2020 |  | January 27, 2019 |  | January 28, 2018
Domestic | $ | (24,530 | ) |  | $ | (13,667 | ) |  | $ | (16,585 | )
Foreign | 69,115 |  |  | 83,787 |  |  | 74,341 |
Total | $ | 44,585 |  |  | $ | 70,120 |  |  | $ | 57,756 |
The provision for income taxes consisted of the following:
| Fiscal Year Ended
(in thousands) | January 26, 2020 |  | January 27, 2019 |  | January 28, 2018
Current income tax provision (benefit) |  |  |  |  |
Federal | $ | 6,463 |  |  | $ | (147 | ) |  | $ | 2,108 |
State | 100 |  |  | — |  |  | — |
Foreign | 11,861 |  |  | 21,753 |  |  | 13,442 |
Subtotal | 18,424 |  |  | 21,606 |  |  | 15,550 |
Deferred income tax provision (benefit) |  |  |  |  |
Federal | 74 |  |  | (24,928 | ) |  | 7,363 |
State | (33 | ) |  | — |  |  | — |
Foreign | (5,637 | ) |  | 3,677 |  |  | (60 | )
Subtotal | (5,596 | ) |  | (21,251 | ) |  | 7,303 |
Provision for income taxes | $ | 12,828 |  |  | $ | 355 |  |  | $ | 22,853 |
The 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 26, 2020 |  | January 27, 2019 |  | January 28, 2018
Federal income tax at statutory rate | $ | 9,328 |  |  | $ | 14,725 |  |  | $ | 19,591 |
State income taxes, net of federal benefit | 68 |  |  | (55 | ) |  | (159 | )
Foreign taxes differential | (966 | ) |  | 2,910 |  |  | (8,698 | )
Tax credits generated | (2,026 | ) |  | (3,344 | ) |  | (3,278 | )
Changes in valuation allowance | (2,722 | ) |  | (23,029 | ) |  | (41,911 | )
Gain on intra-entity asset transfer | 6,802 |  |  | — |  |  | — |
Changes in uncertain tax positions | 8,636 |  |  | 2,219 |  |  | 1,538 |
Equity compensation | (6,008 | ) |  | 786 |  |  | (8,040 | )
Permanent differences | — |  |  | — |  |  | 264 |
GILTI and Subpart F income | 538 |  |  | 1,164 |  |  | 299 |
Impact of U.S. tax reform (1) | — |  |  | 1,904 |  |  | 65,442 |
Other | (822 | ) |  | 3,075 |  |  | (2,195 | )
Provision for income taxes | $ | 12,828 |  |  | $ | 355 |  |  | $ | 22,853 |
(1) During fiscal year 2020, the Company continued to maintain a valuation allowance against foreign tax credits. The impact of the U.S. tax reform for fiscal year 2019 included a tax benefit from the overall reduction to the transition tax of approximately $5.0 million and a tax expense from the reduction to foreign tax credits of approximately $6.9 million. The impact of the U.S. 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. The Company’s tax expense benefited from its operations in lower tax jurisdictions such as Switzerland, research tax credits and the recognition of excess tax benefits related to share-based compensation. These benefits were offset by one-time tax expense related to gain on intra-entity asset transfer and the impact of finalized regulations on the U.S. transition tax. On December 6, 2016, the Company was granted a tax holiday ("Tax Holiday") with an effective date of January 30, 2017. The Tax Holiday provides Semtech (International) AG with a 70% reduction to the Swiss Cantonal tax rate, bringing the statutory Swiss 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. On May 19, 2019, Switzerland approved the Federal Act on Tax Reform ("Swiss Tax Reform"). One main component of the Swiss Tax Reform included reduction of Cantonal income tax rates. The Swiss Tax Reform dropped the statutory Swiss Cantonal tax rate down from 12.56% to 8.46%. Semtech’s Tax Holiday provides Semtech (International) AG with a 70% reduction to this new Swiss Cantonal tax rate, bringing the statutory Swiss Cantonal tax rate down from 8.46% to 2.54%. All other provisions of the existing Tax Holiday discussed above still apply. 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 included 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 was imposed on a U.S. stockholder’s historical undistributed earnings of foreign affiliates. 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. Global Intangible Low Taxed Income: 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. stockholder. 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. 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. 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 Staff Accounting Bulletin ("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 $547.9 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 determined it will remit approximately $240.0 million of foreign earnings in the foreseeable future, and as a result, established a deferred income tax liability for the withholding tax that will be due upon distribution of these earnings. During fiscal years 2020 and 2019, approximately $76.1 million and $80.0 million, respectively, 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 26, 2020 and January 27, 2019 were as follows:
(in thousands) | January 26, 2020 |  | January 27, 2019
Non-current deferred tax assets: |  |  |
Inventory reserve | 4,147 |  |  | 4,984 |
Bad debt reserve | 20 |  |  | 17 |
Foreign tax credits | 1,331 |  |  | 2,996 |
Research credit carryforward | 6,063 |  |  | 6,693 |
NOL carryforward | 7,659 |  |  | 8,773 |
Payroll and related accruals | 9,383 |  |  | 8,133 |
Share-based compensation | 5,607 |  |  | 14,047 |
Foreign pension deferred | 2,070 |  |  | 832 |
Accrued sales reserves | 746 |  |  | 763 |
Research and development charges | 2,864 |  |  | — |
Goodwill and other intangibles | 2,875 |  |  | — |
Leasing deferred assets | 2,396 |  |  | — |
Other deferred assets | 1,713 |  |  | 1,031 |
Valuation allowance | (16,189 | ) |  | (18,912 | )
Total non-current deferred tax assets | 30,685 |  |  | 29,357 |
Non-current deferred tax liabilities: |  |  |
Goodwill and other intangibles | — |  |  | (3,227 | )
Property, plant and equipment | (6,034 | ) |  | (6,482 | )
Repatriation of foreign earnings | (4,323 | ) |  | (8,158 | )
Leasing deferred liabilities | (2,285 | ) |  | — |
Other non-current deferred tax liabilities | (1,549 | ) |  | (592 | )
Total non-current deferred tax liabilities | (14,191 | ) |  | (18,459 | )
Net deferred tax assets | $ | 16,494 |  |  | $ | 10,898 |
As of January 26, 2020, the Company had state net operating loss carryforwards of $105.6 million, which, subject to certain limitations, are available to offset future taxable income through fiscal year 2040. As of January 26, 2020, the Company had gross federal and state research credits available of approximately $11.0 million and $15.1 million, respectively, which are available to offset taxable income. These credits will expire between fiscal years 2029 through 2040. The Company also had gross Canadian research credits available of approximately $0.5 million. These credits will expire by fiscal year 2040. As of January 26, 2020 and January 27, 2019, the Company had approximately $32.7 million and $29.8 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 $16.2 million and $18.9 million against its deferred tax assets at January 26, 2020 and January 27, 2019, 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 26, 2020, on both an annual and cumulative basis. Changes in the valuation allowance for the three years ended January 26, 2020 are summarized in the table below:
| Fiscal Year Ended
(in thousands) | January 26, 2020 |  | January 27, 2019 |  | January 28, 2018
Beginning balance | $ | 18,912 |  |  | $ | 41,050 |  |  | $ | 82,961 |
Additions | 159 |  |  | 152 |  |  | 74 |
Releases | (2,882 | ) |  | (22,290 | ) |  | (41,985 | )
Ending balance | $ | 16,189 |  |  | $ | 18,912 |  |  | $ | 41,050 |
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 26, 2020 |  | January 27, 2019
Beginning balance | $ | 18,293 |  |  | $ | 16,059 |
Net additions based on tax positions related to the current year | 2,252 |  |  | 2,642 |
Additions based on tax positions related to prior years | 6,850 |  |  | — |
Reductions as a result of lapsed statutes | (399 | ) |  | — |
Reductions for settlements with tax authorities | (1,530 | ) |  | (408 | )
Ending balance | $ | 25,466 |  |  | $ | 18,293 |
Included in the balance of gross unrecognized tax benefits at January 26, 2020 and January 27, 2019, are $8.6 million and $4.5 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 26, 2020 |  | January 27, 2019
Deferred tax assets - non-current | $ | 15,575 |  |  | $ | 12,492 |
Other long-term liabilities | 8,555 |  |  | 4,479 |
Total accrued taxes | $ | 24,130 |  |  | $ | 16,971 |
The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes in the Statements of Income. Since the Company has sufficient research and development ("R&D") credit carryforwards, there was no cash tax liability and, therefore, no additional penalties or interest accrued during fiscal year 2020. The Company had approximately $0.3 million of net interest and penalties accrued at January 26, 2020. 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 2019. 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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